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Script
You can find the “slides” here. Thank you,
for the video!Welcome to my first lecture on value investing: “Understanding Compound Interest and Financial Independence”—it’s the lecture I wish I had when I was at university.
I am doing this, because it’s fun, and I learn a lot. But there is also a more personal reason. I was always worried that I would end up doing a job I hate just to make a lot of money for my family. Call me selfish, but I can’t see myself living that way. When I discovered value investing, I realized I don’t have to. Knowing that financial independence—even wealth—is achievable without sacrificing time for money, without stress and even without a high salary - that provides incredible peace of mind. That’s the knowledge I want to share. I hope it helps.
The key to all this is what Einstein called the 8th wonder of the world: compound interest. It is the fundamental concept behind value investing. Let me illustrate with some examples.
In 1626, the Manhattan Indians sold the island to Peter Minuit for just $24.
By 1965, when Buffett wrote about it, that land was worth around $12 billion.
It sounds like a rip-off—until you do the math. If the Indians had achieved a modest 6.5% annual return, their $24 would have grown to $42 billion by 1965. That’s the power of compounding over time.
Berkshire Hathaway’s investment manager Ted Weschler opened a retirement account in 1984 at age 22, earning $22,000 annually.
By 1989, when he left his job, the account had grown to $70,000.
He never contributed another dollar, investing only in public stocks with an annualized return of around 33%.
By 2018, the account had grown to $264 million.
Kindergeld
Consider Germany’s child allowance (“Kindergeld”), which provides €255 per month, totaling about €3,000 per year.
By the time a child turns 20, that amounts to €60,000.
If this sum is invested at a 15% return and left untouched:
At 40, it grows to €1 million.
At 60, it reaches €16 million, generating €2.4 million per year in passive income. Not a bad retirement!
This strategy allows financial freedom without requiring a high salary. That’s what I plan for my children. I’ll teach them value investing, then give them their Kindergeld at 20 to manage. They will become financially independent without inheriting much and it will be their own accomplishment!
They can still try to become a DAX CEO or McKinsey partner, if that’s what they love doing. But they won’t have to do it for the money.
This knowledge gives me peace of mind. So why don’t more people get excited about compounding? Why do they chase get-rich-quick schemes or high salaries at the cost of quality of life?
I believe it’s because:
Lack of education – Nobody teaches us this in school.
Difficulty grasping exponential growth – Our brains aren’t wired for it.
We know intuitively that saving 10k € per year for 40 years gives you €400k. But what about compounding 10k € at 15% for 40 years? Is that more or less? We don’t have a feeling for exponential growth, so we avoid it. (It’s more than €2,5 million…)
I believe that the most important skill for a value investor is to intuitively understand compound interest. That’s the only way to get excited about compounding for a long time. And that excitement is the most important prerequisite to actually stick to the plan.
That means: you should actually be able to compound in your head. And I will show you how.
It’s actually simple. The Rule of 72 helps estimate doubling time:
72 / Interest Rate = Years to Double
10% return? 72/10 = 7 years
15% return? 72/15 = 5 years
5% return? 72/5 = 14 years
Let’s apply this to our earlier example: €10,000 at 15% for 40 years.
72/15 = 5 years per doubling
⇒ in 40 years that will be 8 doublings (40/5)
How much is 8 doublings?
2, 4, 8, 16, 32, 64, 125, 250, 500, 1000 ⇒ you just have to learn these 10
Here’s a trick for even higher numbers:
18 doublings = (10 doublings) x (8 doublings)
1,000 x 250 = 250,000x growth factor
It takes some practice, but then it’s almost like a superpower. Buffett and Munger didn’t use a computer. They didn’t even use a calculator. They sometimes used compounding tables but mostly did the calculations in their head.
You will be able to immediately understand investment results. Example: A friend claims real estate is superior to stocks: “My parents bought a house for €500,000 ten years ago, and now it’s worth €1 million.”
You instantly know that one doubling in 10 years is 7% per year (72/10). A stock portfolio compounding at 15% would have doubled twice, reaching €2 million. Therefore, the house underperformed by €1 million.
One last example: Let’s plan your financial independence! You can do that with different numbers, I will use the following case:
Disclaimer: This example ignores inflation. To adjust for inflation, subtract 2-3 percentage points from your assumed interest rate.
Goal: €100,000 per year in passive income by age 60
Safe withdrawal rate: 5%
Required capital: €2 million
If I know how to compound capital at 15%, I would need to start with
8k € at 20 or
30k € at 30
If my average net income during my 20s is €30k per year, I would only need a 10% savings rate. Even if it is only €15k, I could reach my goal with a savings rate of just 20%. And that’s if I’m starting at 0.
You now understand compound interest—a crucial foundation for value investing. This understanding will help you stay committed for the long run.
In the following lectures, I will show you how to actually find mispriced bets that give you a 15% annual return over many years. Let’s be clear: 15% is a crazy good result. It is by no means guaranteed. But it’s definitely possible.
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