Investors often overlook the power of compounding and it’s a big mistake, according to Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management. The widely followed investor believes compound interest, the ability to earn not only interest on the principle but also reinvested interest on the interest, is the key to successful investing in the long run. “Longevity is a giant asset if you’re trying to put up numbers,” Ritholtz said at Future Proof Citywide in Miami Beach. “If you’re in your 20s, 30s, 40s, you have to think about, hey, I have 50 years to let the market compound on my behalf. My job is just to stay out of the way and not interfere with the magic of compounding.” Ritholtz gave an eye-popping example: Using average rates of past returns, $1,000 invested in the broader market would be worth more than $32 million 100 years later. The investor noted that Warren Buffett, a champion of compounding, has doubled his fortune in the past eight years. Buffett, the 94-year-old “Oracle of Omaha,” bought his first very stock, Cities Service Preferred, for $38 a share at the age of 11. By 16, he had amassed the equivalent of $53,000 in today’s dollars. Today, his Berkshire Hathaway conglomerate is worth more than $1 trillion, owning everything from BNSF Railway to ice cream shop chain Dairy Queen and auto insurer Geico. “Warren Buffett has told people, ‘Hey, don’t try to do what I do. Just own a broad index, and if you want to put some flavor around the edges, feel free to,'” Ritholtz said.
Source: Barry Ritholtz says investors should not interfere with the magic of compounding
