Pilot Blog – Introduction to the Perceptive Investor Education
This blog serves as a starting point from which the average investor may commence their journey to financial freedom through education and empowerment in making wiser investment decisions today. Make no mistake though; this blog will not promise you new, innovative ways to make you “rich” over night. After all, “rich” is a relative term, which means something different to every individual. Rather, we will introduce to you the concepts, methods and frameworks we’ve implemented and refined ourselves over the years to earn sufficient returns on our own common equity investments (ie. Stocks) and help guide you to your longer-term financial goals of financial independence.
There is a very well known quote that more or less says: “life is a marathon, not a sprint”. The same wisdom not only applies to being a successful investor, but pretty much anything one wishes to do well in life whether it be to become a professional athlete, expert programmer or prolific artist. Gaining competence and confidence in any endeavor requires dedicated time, focused practice and supportive mentorship.
With 20 years of experience in fundamentals analysis, business development, risk management, strategic decision making, successful investments and an abundance of research behind us, we thought it was finally time to share this knowledge with our friends and family in a simplified and easy-to-understand manner and help them work their way towards greater financial freedom. While it has personally taken me 10 years to get to this point (and still working daily to refine and improve), the purpose of this blog is to help you get there in a much shorter period of time by saving you the heartache of making the same mistakes I made (and believe me, I’ve made plenty costly ones) and distilling the investment process down to the most basic and relevant points needed to become a successful investor. What does a successful investor look like you ask? Here are the primary characteristics in no particular order:
Key traits to becoming a successful investor:
- Capital Preservation – Minimizing chances of complete loss of capital
- Diligent Research – Due diligence of fundamentals through research
- Sound Mindset – Sound decision making rooted in rational behavior
Throughout my years of experience and research on the world’s top investors, although styles may vary from individual-to-individual or company-to-company, these three primary themes stand out as a common link amongst the best of the best who have successfully and continuously beat the returns of stock market indices (ie. S&P 500, Dow Jones Industrial Average and the NASDAQ).
To begin, I will start with an explanation of one very simple, but powerful concept that every successful investor in the past has understood and one every new investor should have deeply rooted in their minds. That is the effect of compounding interest.
What is Compounding and How Does It Work?
Basic Explanation of Compounding
The concept of compounding (or compounding interest) is something most of you were probably introduced to sometime during your education but likely glossed over, as I did, as it likely it simply wasn’t interesting at that time. The fact of the matter is, the concept of compounding interest is one that has been recognized by the best and brightest in math and investing, notably Albert Einstein and Warren Buffett.
Einstein famously quipped:
“Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.”
While Buffet also said:
“My wealth has come from a combination of living in America, lucky genes and compound interest.”
Compounding interest may be simply defined as interest earned on the sum of interest earned on some initial amount of funds (ie. Principal). In other words, let’s say today you have $10,000 in your interest bearing savings account, which pays 5% annually on that sum of money. At the end of the first year you will have earned interest on that $10,000 of 5% or $500. The total amount of money you will have at the end of the first year is $10,500 (Y1). If that same amount of money sits in the same interest bearing bank account at the same interest rate of 5%, you will have made $525 (5% * $10,500) at the end of year 2 for a total of $11,025 (Y2). If you continue to compound annually at this rate, you will have a total of $11,576 at the end of year 3 (Y3) as can be seen in the diagram below.
Compounding Interest Contrasted with Simple Interest
Compound interest may be contrasted with its less effective cousin, simple interest which is defined as interest earned on only the initial amount of funds (or the principal). If we use the same numbers from the example above, your account would look like this:
As you can see from the examples above, compounding interest on an annual basis at 5% will leave you with $11,576 at the end of year 3 while a simple interest account would have made you $11,500 or $76 less. At first glance these figures might look small, but when extended over 5 and even 10 years, the balance in your account could be viewed in the table below.
When comparing the two methods in the table above and knowing that compounding interest works in your favor by simply allowing your money make money for you, the case for buying and holding quality companies over the long-term (at least 3 to 5 years at a minimum) is very attractive and therefore the need to develop key traits of successful investors, notably diligent research and a sound mindset, is key to achieving above average returns.
In summary, the concept of compound interest is extremely powerful and in order to properly harness the power of this concept, the need to develop diligent research skills and a sound mindset, which will simultaneously aid in preserving capital, will be key in achieving this. Throughout this blog we will focus on content which will guide you in developing these skills as well as sharing our thoughts on various companies across various industries to provide you some confidence in your own investment decision making.
Key phrases: Preservation of Capital, Sound Research, Strong Mindset, Compounding