I don’t know who owns this home, but I promise they’re having a bad day…
Last month, the unfortunate owners of this Outer Banks, North Carolina, property lost it to the ocean. Twenty years ago, the house had plenty of beach in front of it.
Today, that’s clearly no longer the case.
No doubt, the owners would have taken preventative measures if a sudden event destroyed half of their “front yard” in a single day. (Because there are preventative measures to be taken, costly though they are.) But that’s not how it happened.
It was the constant lapping of the waves combined with the occasional storm surge that eroded the beach little by little by little… until the beach simply didn’t exist any longer.
It’s a bit like the old saying about how you go bankrupt. Gradually… then suddenly.
The truth is that profound changes, whether good or bad, tend to be built upon small, almost imperceptible events that occur over years and years.
That’s how you lose a home to the ocean. But it’s also how you build a world-class investment portfolio – the kind you pass on to your children and grandchildren.
You just have to have the knowledge, time, and discipline to make it happen.
A Little Really Can Go a Long Way
We’ve been covering several interesting topics the past few days: The decline of work-from-home, the insatiable demand for energy from the AI players, even the bubble forming in the humble carwash industry.
But today, I’d like to back up and share what we believe here at Wide Moat Research. Longtime readers will have heard it before. However, it never hurts hearing again…
Great wealth can be created with the right application of knowledge and discipline. And yes, I fully recognize the obvious that discipline isn’t always fun.
In fact, it almost never is. Yet it has an equally consistent track record of paying off.
For example, when I first started writing financial articles back in 2010, I was lucky to get 20 readers. At times, I’ll admit, that felt demoralizing – particularly when I had a family of seven to feed.
But I kept at it, writing every day until I gained 50 followers… which slowly amassed to 379… and then 1,001… then 4,500… and so on, all the way up to 200,000!
It took over a decade to achieve that count, but, man, it was worth it. That’s why I’m such a big believer in the power of repeatability. It’s made such a difference in my life.
I’ve seen that same force in my gym routine. Not that long ago, as my financial analyst star was rising and I was starting to get media appearance requests, I realized I wasn’t as camera-ready as I wanted to be.
Let’s just say I’d packed on a few pounds since my days of playing college basketball. So, I cut out junk food and started working out almost every morning.
That effort didn’t mean I dropped the weight right away. And some days were easier to deal with than others.
But here I am, some 10 years later, feeling fit as a fiddle.
That same power of repeatability can apply just as much – if not more – to your investments.
Compounding Makes Your Money Matter Even More
In the world of investing, compounding is when you earn returns not just on your original investment but on the returns from that original investment as well. In practice, this means you:
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Put money into an asset
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That asset pays interest or dividends
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You put that interest or dividend back into the asset
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That asset you now own more of pays even more interest or dividends
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You put that extra money back into the asset.
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And so on
I know this is a topic I’ve talked about before. But I can guarantee I’ll be talking about it again from here.
It’s that important.
Someone – perhaps Albert Einstein – once called compound interest “the eighth wonder of the world” for its wealth-building capabilities. Whether Einstein actually said that is a different matter, but the sentiment is correct. It’s an assessment Warren Buffet would agree with. He’s actually gone so far as to say his entire life “is a product of compound interest.”
Seth Klarman, CEO of the wildly successful hedge fund Baupost Group, has also weighed in on the subject. “The effects of compounding even moderate returns over many years are compelling, if not downright mind boggling,” he’s claimed.
Then there’s Howard Marks, Co-Chair of Oaktree Capital Management, the world’s largest investor in distressed assets. He said, “Of critical importance, equity investors should make their primary goals:
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Participating in the secular growth of economies and companies
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Benefitting from the wonder of compounding.”
Dividend stocks are one of the best ways to capitalize on both those points. It’s hard to go wrong with well-placed, well-managed companies that know their markets, respect their customers, and keep intelligently raising their dividends year after year after year.
At the risk of once again stating the obvious… that means you’re getting a doubly growing amount of capital to reinvest.
But again, this does require patience and commitment. And those virtues simply aren’t something everyone is willing to act on. They want to be rich, and they want to be rich right now.
As a result, they make mistakes, become greedy, and dig themselves into holes they can’t escape.
Others are able to be patient for a period of time. But then life gets complicated and some luxury comes up that they really want… and so they cave to the pressure of keeping up with the Joneses.
That’s a shame because it puts an abrupt stop to their money-building process. Even if they get back on the bandwagon a few years later, they’ve lost out on so much wealth accumulation in the end.
To quote Charlie Munger, Buffett’s late business partner, “The first rule of compounding” is “never interrupt it unnecessarily.” The longer you let it run, the greater its power grows.
Small, repeating events can take down a beachside home on the North Carolina dunes. But it can also create wonderful returns for your investments.
That is, of course, if you let it.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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Aside from repeatability, what steps are you taking to build a world-class investing portfolio? Write us at feedback@widemoatresearch.com.