Compounding
The case for caring about quality and valuation in one table: over long horizons, small differences in annual return compound into enormous differences in outcome. Formula: each year, wealth grows by the rate and the annual contribution is added.
| Annual return | After 30 years | vs 7% |
|---|---|---|
| 5% | $2.1M | −$1.0M |
| 7% | $3.1M | — |
| 10% | $5.9M | +$2.7M |
| 12% | $9.0M | +$5.9M |
| 15% | $17.5M | +$14.4M |
Nominal figures; subtract ~2-3 points from returns to think in today's dollars. The gap between 7% and 12% is the entire argument for owning better businesses at sensible prices.