Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

Attributed to Albert Einstein

The concept behind the compound interest is very simple.
Imagine you have a bank account that earn you an annual interest of 4% (it is an utopias today), if you put 1000USD in your bank account the 1 january of the year, at the end of the year your account gain is 40USD (1000*0.04), hence you will start the new year with 1040USD on your account. If the next year the bank will give you another 4% interest rate and you don’t withdraw money at the end of the year, you will end with the initial amount of 1040USD plus interest, but this time the interest would be 4% of 1040USD that will be 41.6USD for a total of 1081.6 in year two.
This pattern will be followed for the following years and it will become exponential.

Below you can see the result after 30 years of compounding for only 1000USD at 4% yearly without further deposits.

You can test the potential of this concept through the link below:

Compound interest calculator US gov

As investors this becomes relevant, because our goal is to find businesses that compound their capital, consequently our wealth far above 4%.
Personally I look for companies that compound 15%+.

If we will find and we will stick with companies that have such marvel we will do well in the long run.
Obviously is matter of time and patience, citing the great investor of all time:

“The stock market is a device for transferring money from the impatient to the patient.”

Warren Buffett

In the next article I will write about different ways used by companies to pay us back as investors.

Following chapter 7. How companies reward us

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“Everything should be made as simple as possible, but not simpler.”

Albert Einstein