- You invest $1,000 in a company early in your life (age 25) and hold it until retirement (age 65) and this company gives you 16% annually for the 40-year period; your initial $1,000 will be worth $326,000 at retirement.
- You invest $2,000 in two companies ($1,000 in each company) and hold it for 40-years and these two companies give you 14% annually for the 40-year period; your initial $2,000 will be worth $331,000 at retirement
- You invest $4,000 in four companies ($1,000 in each company) and hold it for 40-years and these four companies give you 12% annually for the 40-year period; your $4,000 will be worth $332,324 at retirement.
- You invest $8,000 in eight companies ($1,000 in each company) and hold it for 4-years and these eight companies give you 10% annually for the 40-year period; your $8,000 will be worth $329,158 at retirement.
We can approximate from the calculations above:
- $1,000 growing at 16% for 40-years = $8,000 growing at 10% for 40-years
- $1,000 growing at 16% for 40-years = $4,000 growing at 12% for 40-years
- $1,000 growing at 16% for 40-years = $2,000 growing at 14% for 40-years
In baseball analogy, the 10% returning investment is a single; the 12% returning investment is a double; the 14% returning investment is triple and 16% returning investment is an old-school non-juiced natural-power home run.
Consider investor X; X is a risk taker. This person always tries to find the next big thing. LetÂs suppose this person starts with $8,000 at age 25 and buys into 8 companies with home-run/strikeout type of potential. If 7 of his companies strike-out and go bankrupt, but if only one survives and gets 16% return for 40-years; this investor will have same amount of money as investor Y who invests $8,000 for 10% return. The investor X survives in the investment world even if the investment success rate is only 12.5% for investor X.
Now, the question is:
Since $1,000 invested at 16% gives you the same terminal value as $8,000 invested at 10% in 40-years, should an investor always try to look for the home runs? Should an investor only try to find the next Microsoft, Dell, Cisco, Coca-Cola, Home-Depot, Wal-mart type of stocks and latch on for the 16% ride? Or should an investor invest more money and hit singles with many stocks? Should an investor go for 3-4 yard conservative rushes or go for 50-60 yard bombs and risk interceptions? Should an investor go close to the basket to get a high-percentage two points or pull up at mid court every time for a low-percentage three points?
Your comments are always welcome.