I invested $10,000 into Amazon (AMZN) during the Dotcom bubble.

I didn’t, but if I had, it would be north of $4,000,000 as of last Friday’s close. At the time, Amazon was down over 90% so the thought of doing that was nonexistent. That’s why November 2008 during the Great Financial Crisis I invested $10,000. Today that is worth roughly $750,000. However, I didn’t do that either because the thought of doing so was unthinkable amid a recession. So that’s why I decided to invest three years later in November 2011. The $10,000 I invested is now worth about $120,000. Except, I didn’t because I thought Amazon was too big of a company with a total market capitalization of more than $100 billion1.

Not every investment is an Amazon, but the opportunity for exponential returns is possible if you allow it.

Albert Einstein called compounding the eighth wonder of the world. I truly believe it is, and when you understand how powerful exponential numbers are, you won’t want to miss the chance for your wealth to do the same.

The problem is, our understanding of exponential growth is weak. I recently spoke to a good friend of mine who had some questions about what to do with some money he had saved. He wasn’t sure what his first step should be. The feeling of losing to inflation, or losing to time, led him to feel anxious and worried that making the choice between investing or putting money down for a home could set him back years.

I told him the following example to help him feel like he didn’t have to sacrifice one for the other. Even though my friend is wicked good at math, as humans, our intuition about exponential growth is warped. The example went as such:

The average magazine has a thickness of 2mm.

I asked him: “If you were to fold and double the thickness of this magazine, how many folds would it take to reach the height of Mount Everest?” (i.e., 1st fold = 4mm, 2nd fold = 8mm, 3rd fold = 16mm).

Him: “Hmm, I’m guessing a couple hundred.”

Me: “24.”

Him: “Oh, wow!”

Me: “Do you know how many folds it would take to pass the height of the Burj Khalifa (tallest building in the world)?”

Me: “Just 20. In less than three folds after passing the Burj Khalifa, you are already taller than Mount Everest.”

Source: @ecoinometrics on Twitter

This goes to show that you don’t have to make large investments to see outsized returns. Having a diversified portfolio of small bets can reap bounties for many seasons, even if you don’t pick the right stocks. Although it certainly helps if you do. Even if you only invested $10,000 in the S&P 500, letting your money compound at 8% a year for 20 years (no additions) will yield $45,000. Just 10 more years after that and you’re over $100,000!

The beauty of compounding is that if you can focus on the bigger picture, instead of the small details, it will be easier to experience the magic of exponential growth.

Kenneth Wolin
Portfolio Administrator