The concept of compounding may be boring but Bruno Paulson, Portfolio Manager at Morgan Stanley Investment Management, believes more investors should be focused on the advantages it brings rather than trying to get rich quickly.
“If you can compound at 10% a year, you double your money in seven years, you quadruple your money in 14 years. You have eight times your money in 21 years. And if you’re thinking about your retirement, that's the kind of timeline you should be thinking about.”
Bruno and his team look for high-quality compounders with characteristics such as brands popular with consumers, software and services crucial for businesses, and networks that people trust. They avoid sectors that are too capital intensive and cyclical.
In this short video, Bruno explains why it’s better to “get rich slowly”.
Compounding is the core of what we do. And we call what we do a “get rich slowly” scheme. Too much of the market is chasing the fast dollar, right? You know, “I want to be up 20% in six months” and it’s basically greedy.
What's distinct about us, is we're thinking about the very long-term and also thinking about avoiding losing money. Our mantra is “Rule one, don't lose money. Rule two, don't forget about rule one.” What does that mean? Well you try and avoid the permanent destruction of capital by trying to avoid those companies where the earnings or the multiple goes away.
What's great about compounding? Well, if you can find companies that can grow at 5% a year, year in, year out – not grow great for four years and then fall off a cliff when the next downturn comes, or the iron-ore price goes downhill – if you can find those companies that grow steadily at 5%, maybe boosting a bit with the margin and have a roughly 5% free cash-flow yield, then what's five plus five? It’s 10%.
That doesn't sound that exciting but if you can compound at 10% a year, and I'm not making a forecast, but if you can compound at 10% a year, you double your money in seven years, you quadruple your money in 14 years. You have eight times your money in 21 years. And if you’re thinking about your retirement, that's the kind of timeline you should be thinking about: Get rich slowly.
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