Power of Compunding

Albert Einstein once noted that the most powerful force in the universe was the principle of compounding. In investing, this manifests itself through something called compound interest.
Put in its simplest terms, the phrase compound interest means that you begin to earn interest income on your interest income, resulting in your money growing at an ever-accelerating rate.

 Below is an example of the returns from compounding with various hypothetical investment returns. The table below assumes that the returns are re-invested every year. The longer you leave the money untouched, the higher the returns and the returns are exponential.

Compound Interest Tables - The Value of $10,000 Invested in a Lump Sum

4%8%12%16%
10 Years$14,802$21,589$31,058$44,114
20 Years$21,911$46,610$96,463$194,608
30 Years$32,434$100,627$299,600$858,500
40 Years$48,010$217,245$930,510$3,787,212
50 Years$71,067$469,016$2,890,022$16,707,038


Mohnish Pabrai is the founder and Managing Partner of the Pabrai Investments Funds, the founder, and CEO of Dhandho Funds, and the author of The Dhandho Investor and Mosaic: Perspectives on Investing. He is a follower of Charlie Munger and Warren Buffett and is a very successful fund manager. He created a video below to demonstrate the power of compounding with an interesting story


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