The Wonders And Horrors Of Compounding
Below is a MRR and PLR article in category Finance -> subcategory Other.
The Wonders and Pitfalls of Compounding
Introduction
The headline "Google Price Target: $16,578.90" might make some of you chuckle. For those who didn’t catch the joke, the addition of ninety cents was a hint. But if you're here for insights on Google, I’m afraid you’ll be disappointed. Instead, I’m diving into the fascinating world of compounding.
The Power of Compounding
In Warren Buffett's annual letter to shareholders, he presents a compelling example: from December 31, 1899, to December 31, 1999, the Dow Jones rose from 66 to 11,497. Most would guess this required a high growth rate, but it was a mere 5.3% compounded annually. Achieving this rate in the 21st century would necessitate the Dow reaching precisely 2,011,011.23 by the end of 2099. Yet, even a small increase in this rate dramatically alters outcomes. A 6% annual growth would have seen the Dow at 22,302.33 by Y2K.
The Impact of Small Percentages
The difference between a 5.3% and 6% return might seem negligible, but over a century, it’s monumental. An extra 0.7% could have seen the Dow breaking 10,000 as early as 1987. This illustrates one of my core pieces of advice: time is more powerful than money.
Invest wisely over long periods without immediate taxation and you'll accumulate wealth considerably. Owning part of a business is key to this strategy.
Speculations on Google's Future
Now, about Google: suggesting a 50-year price target of $16,578.90 is, obviously, speculative. Let's explore what it would take to reach this number. Assume Google, currently valued at $31.87 per share, achieves a 12% return on equity without diluting shares over the next five decades.
By 2056, with a 12% annual return reinvested, Google would become a $312 billion profit engine. Its market cap, with a P/E of 15, could reach $4.68 trillion. Thus, that $378.18 share price might climb to $16,578.90.
Challenges and Realities
However, two realities temper such scenarios. First, Google retaining all earnings for 50 years is improbable. Second, even if the target is reached, your annual compound return would only be about 7.85%, even before accounting for taxes and inflation.
If you’re paying 12 times book value now, you're paying up for the growth of ordinary profits, leading to ordinary gains. A lower P/E might yield a higher return, about 13.32%, but it's still bound by the constraints of return on equity.
Long-Term Investing Insights
Buffett wisely notes that market success often depends on timing and that real wealth comes from a company’s intrinsic profitability. There’s no magic to extract wealth beyond what companies create themselves.
In essence, while I used Google to capture your attention, it illustrates that even extraordinary companies have intrinsic limits. Excess equity will likely convert into dividends, stock buybacks, or new ventures.
Conclusion
In closing, as Ovid once said: "Tempus edax rerum"?"Time devours all things. It’s essential to appreciate both the wonders and limitations of compounding over time.
You can find the original non-AI version of this article here: The Wonders And Horrors Of Compounding.
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