When I was in school, I was always told to buy and hold… it’s the classic long term investment strategy…

Warren Buffett is one of the wealthiest men in the world and the billionaire all billionaire’s aspire to be.

No question about it, Mr. Buffett knows how to invest in stocks, the man will go down in history as a legend.

Buy and hold is great if you have decades to sit on a stock…but what about us? We don’t have decades to wait—we need results now.

So what exactly we can learn from the Oracle of Omaha if we’re trading a small account?

The power of compounding returns.

I’m stealing a page out of Warren’s playbook to school you on how to take a small account and turn it into a substantial grubstake by using the forces of compound returns.

 

The Power of Compounding

 

When it comes to calculating interest, there are two basic choices: simple and compound.

Simple interest is calculated as a set percentage of the original principal every year.

The way I like to describe compound interest is “interest on interest.”

This creates a powerful effect on wealth creation… and the reason many investors are so successful.

When you are able to  make “interest on interest,” capital will grow at a faster rate than simple interest, which is calculated only on the principal amount.

How does it work?

… you continue to reinvest your returns, as opposed to taking them out…

Let’s say you invest $10,000 at a 10% simple interest. At the end of the year, your investment capital is now $1,000 higher ($11,000)…

If you take the $1,000 out, or don’t reinvest it… then you make 10% the next year, you make another $1,000… continuing on this way, you are building your wealth by $1,000 per year…

$10K isn’t going to take you far by following this method.

Now let’s say you are compounding those returns instead…

The first year will actually be the same… 10% return on $10,000… you now have $11,000.

Now here’s the difference… instead of taking the $1,000 out of your account, you continue to invest it along with your original $10,000…

In year 2, you now make 10% return on the original $10,000 and the $1,000 as well (interest on interest)… so instead of a $1,000 increase, you now have an $1,100 increase…

Doesn’t sound like much does it?

This is where it gets good…

Over time by continuing to reinvest and compounding those returns… the capital begins to increase exponentially.

Just take a look at how simple and compound interest compare over a 50-year period:

 

The blue line shows where you would be by compounding your returns on $10,000 over 50 years and the red line shows the capital you end up with when simply making a 10% return every year on the original $10k only…

You may be surprised at how quickly this can add up. At 10% simple interest, your $10,000 investment would be worth $60,000 after 50 years…

However, here’s where the incredible effects of compounding comes into play… by compounding your returns, your capital would balloon to more than $1,000,000 in the same 50 years…

Just look at Warren Buffett… over the past 50 plus years, a $10,000 investment in a low-cost S&P 500 index fund would have grown to over $1.2 million…

But with the superior stock-picking of Warren Buffett along with the compounding effect… the same $10,000 investment would be worth around $200 million… WOW!

That’s the power of sustained outperformance while compounding returns along the way, and is the primary reason Warren Buffett is one of the world’s richest people today.

If that doesn’t convince you… stop reading… but if you want to amass true wealth, let’s get into it…

You don’t have to start with a lot of money… and you don’t need a time machine to go back to begin at a younger age…

You can stack gains and compound on the daily by trading penny stocks…

Should you have long term investments?… absolutely… I sure do…

But if you are late to the game, or want a great kick start… this is what I do

I developed a system that lets me capture great returns every day and week… and then stack my gains by compounding those returns each week.

In fact I have created a small account challenge to prove it…

I start with $3,000 and from there I let my returns compound by keeping them in the account and continuing to make gains on gains… over and over…

My most recent account challenge was started in mid June and in that 3 short months is now at nearly $20k….

How?

Well I use the power of compounding my returns…

Starting with $3k, I make trades using my simple and consistent system… every time I bank a gain, I leave it in the account and now I am trading with more money and compounding those returns…

If you want to learn how to compound returns and grow capital quickly then join me in my trading room,  start with a small amount and I’ll work with you to stack it up.  

Author: Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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