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Compound Interest Is Real Modern-Day Alchemy

Dividend growth investing enables a compounding of investment returns that is nearly certain to build wealth over the long run.

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Dividend growth investing enables a compounding of investment returns that is nearly certain to build wealth over the long run. This is particularly true when investors have a long time horizon.

Someone’s sitting in the shade today because someone planted a tree a long time ago.
Warren Buffett

Surprisingly, this is similar to medieval alchemy. Alchemy was the early field of science where experimentalists toiled to turn base metals such as iron and lead into precious gold – a much more valuable substance.

Compounding is modern day alchemy.

What is alchemy?

Alchemy was the pseudoscience centered around the creation of a philosopher’s stone.

Although one had never been discovered or created, a philosopher’s stone was believed to hold the power to change base metals (like iron and lead) into precious metals – most often gold.

Medieval alchemists have long been ridiculed. With today’s knowledge of science and technology, a simple look at the periodic table tells us that there is no way to turn base metals into gold. They are different substances, after all.

However, this does not mean that the alchemists lacked intelligence. Johns Hopkins University’s Lawrence Principe described medieval alchemists as “amazingly good experimentalists,” saying:

Any modern professor of chemistry today would be more than happy to hire some of these guys as lab techs.

Now that a historical background has been established, the similarities and differences between compounding and alchemy will be discussed in detail.

Similarities and differences between compounding and alchemy

Despite seeming quite different on the surface, the main goal of alchemy and compounding is the same: to multiply wealth over time.

Unlike alchemy, compounding is a notably powerful force. Many people have commented on its surprising capability to build wealth, including one of the brightest minds ever – Albert Einstein.

Consider the following quote.

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.
– Source disputed, often attributed to Albert Einstein

Compounding often occurs when investors purchase shares of high-quality dividend growth stocks such as:

Historically, these companies have delivered outsized returns to their shareholders, above the market’s long-term average of 8-10%. This has multiplied wealth over time – similar to alchemy.

An 8% rate of return does not seem to “multiply” wealth on the surface. This amount to earning $8 for every $100 invested – which does not come close to multiplying wealth by even 2x.

The real multiplication begins when this 8% return is compounded over long periods of time.

The following diagram represents the growth of $1,000 compounded over 40 years at an 8% and 10% rate of return.

Growth of $1,000 Over 40 Years[ Enlarge Image ]

Please note that the above diagram is a simplification. In reality, stock market returns experience a certain degree of volatility, resulting in a graph that is more “lumpy” than the one shown above.

The time period in the above graph was chosen for a reason. Forty years represents the approximate length of an average working career.

This means that if an investor can invest $1,000 from their first few paychecks in the workforce, this early money will grow to be approximately $22,000 at an 8% rate of return and approximately $45,000 at a 10% rate of return after 40 years of compounding.

Moreover, this represents a multiplication of 22x and 45x the initial capital investment. Clearly, compounding has the same wealth-multiplying capabilities that alchemists sought from the philosopher’s stone in medieval times.

Compounding and alchemy are also similar in the sense that they are systemic in nature.

Alchemists followed experimental procedures with the goal of creating the first philosopher’s stone. These procedures were likely repeatable, with a step-by-step process documented in laboratory notebooks.

Compounding is similar. Investment returns are maximized when investors stick to a long-term systematic plan. Following a predetermined investment strategy helps minimize the psychological errors inherent in behavioral finance.

The best types of systematic investing systems are based on quantitative characteristics that either increase returns or reduce risk (or both!). At Sure Dividend, that plan comes from The 8 Rules of Dividend Investing which are used to rank stocks with 25 or more years of steady or rising dividends – including the Dividend Aristocrats.

Systematic investing comes in all shapes and sizes. A few other examples are:

  • The Sure Retirement strategy, which applies the 8 Rules to companies with 5% or higher dividend yields.
  • The Coffee Can Portfolio, which advocates for buying high-quality stocks and holding them forever.

The systematic nature of alchemy and investing is the second similarity I wanted to highlight in this article.

Compounding and alchemy also have one major difference. As per Mr. Principe’s quote above, alchemists were generally quite intelligent. This Johns Hopkins University historian stated that medieval alchemists would make great laboratory technicians under modern professors of chemistry.

Unlike alchemy, it does not require a great deal of intelligence to take advantage of the magical power of compounding.

“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
Warren Buffett (Trades, Portfolio)

Moreover, mistakes are common in investing. I make mistakes. Warren Buffett makes mistakes. Every investor does.

“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.”
– Peter Lynch

Mistakes are a natural part of the investment process. This does not mean that you are a bad investor. It also does not mean that you lack the “intelligence” required for investing.

At its heart, investing is actually quite simple – and certainly much less complex than experimental alchemy.

Final thoughts

Alchemy is a medieval pseudo-science based on a phenomenon that we now know is false.

Compounding is an observable effect in the financial markets that will continue to generate wealth for decades to come.

On the surface, they could not be more different. However, each has the same goal – to increase the practitioner’s wealth with very little input. They are also both very systematic in nature, with an alchemist’s laboratory notebook comparable to a systematic investment strategy.

In that sense, compounding is equivalent to modern day alchemy because it allows investors to multiply their wealth in the long run.

Disclosure: I am not long any of the stocks mentioned in this article.

Photo: Grow Your Money – www.ccPixs.com (CC BY 2.0)

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Cryptocurrencies

Why I Changed My Mind on Bitcoin

Verifications blockchain tech makes possible could end counterfeiting. It could end lost or stolen goods.

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Friday of last week, I wrote about the enormous impact blockchain technology could have on retail transactions.

Verifications blockchain tech makes possible could end counterfeiting. It could end lost or stolen goods.

Plus, it could allow for immediate transactions and for goods to be shipped minutes after a confirmed purchase, as opposed to hours or days.

That’s just a quick look at consumer-focused applications.

Banks, brokers, money managers. There are blockchain tech implications for all those jobs too.

Instant stock transfers. Fee-free, immediate ledger reconciliation. The mind reels at the possibilities.

To date, we’re just scratching the surface of how blockchain tech could remove barriers, costs and complications.

Truly, no exaggeration, the long-term promise is a new era of commerce.

That’s blockchain. Blockchain isn’t bitcoin, however.

Before we float away on these rosy dreams, we need to look at the bitcoin/cryptocurrency landscape as it exists today.

Bitcoin’s Worth $94 Billion… and Counting

Initial coin offerings (ICOs) are all the rage right now. New tokens hit the airwaves near daily, sucking up investor interest and making their backers into millionaires.

Bitcoin, trading as I write at $5,696, is up $800 in the last week.

Ethereum trades for $334.

In January, you could get one for $9.62.

By total market cap, bitcoin’s now a $94 billion-plus enterprise.

Ethereum’s at $31.8 billion.

There are now 12 (12!) separate cryptocurrencies with market caps over $1 billion.

Smart money. Dumb money. Undecided money. Call it whatever you want.

There are now tens of billions of dollars invested in cryptocurrencies. Much of it from people who as recently as a year ago would’ve scoffed at the idea of putting money on the line for a digital currency.

This, rightly so, should give you pause. It should make you think of runaway real estate speculation, Pets.com and tulip bulbs being exchanged for diamonds.

I fully admit as recently as a few months ago I shared that opinion. I’ve written to you about it many times.

Here’s the thing…

Every time bitcoin “forks” make news or the Chinese government “cracks down” on cryptocurrency trading or bitcoin prices suddenly dip and then recover…

… cryptos get a fresh injection of news-cycle energy. The mainstream financial media fall all over themselves to explain what happened and why.

Cryptocurrencies have a hold on the public consciousness right now like few assets in history have ever achieved. And yes, many of those that did achieve such news power were classic bubbles.

Return of the “Golden Geeks”

Dot-com stocks made headlines daily in the 1990s.

Netscape’s Marc Andreessen, for example, was on the cover of Time on Feb. 19, 1996, with the headline “The Golden Geeks” and the following text:

They invent. They start companies. And the stock market has made them INSTANTAIRES. Who are they? How do they live? And what do they mean for America’s future?

“Instantaires” was a popular buzzword at the time for folks who became millionaires or billionaires “instantly” after taking a new website public.

Sound familiar?

My point is the cryptocurrency bubble’s going to pop at some point.

In its aftermath, real long-term players will emerge.

And years from now, we’ll all look back at the fortunes we could’ve made in both blockchain tech and the best-of-breed cryptocurrencies like bitcoin.

Netscape isn’t an independent company today, for example. But Marc Andreessen’s still a billionaire.

Blockchain and cryptocurrency tech is here to stay. The changes we’ve seen so far are just the start.

My position’s evolved. Yours should too, if it hasn’t already.

For Tomorrow’s Trends Today,

Ray Blanco
for The Daily Reckoning

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Cryptocurrencies

This family bet it all on bitcoin

The Dutch family of five is in the process of selling pretty much everything they own — from their 2,500-square-foot house, to their shoes – and trading it in for the popular cryptocurrency.

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This family sold everything to make a big bet on bitcoin

Didi Taihuttu, his wife, three kids and their cat bet all they have on bitcoin. The Dutch family of five is in the process of selling pretty much everything they own — from their 2,500-square-foot house, to their shoes – and trading it in for the popular cryptocurrency. They have moved to a campsite in the Netherlands, where they’re waiting for bitcoin to really take off.

It’s only been a few months, but the 39-year-old father of three says he doesn’t regret a thing. “We were just like – sell it, sell it, what can we lose? Yeah, we can lose all the material stuff. Yeah, we can lose all our money. Yeah, we don’t have three cars anymore. We don’t have the motorcycle anymore. But in the end, I think we, as a family, will still be happy and just enjoying life.”

He once mined for bitcoin, but now only trades it, along with other cryptocurrencies like ether, ripple, neo, dogecoin and XLM. The family is still in the process of liquidating assets and investing the proceeds in cryptocurrencies as they go. The income from trading is enough for food and necessities, which the family says is all it needs right now.

Source: Yolo FamilyTravel

Taihuttu’s brother, sister and in-laws call him crazy, but that hasn’t stopped them from taking their experiment public. The Taihuttus are documenting their experience on social media, and they are even taking donations in bitcoin. “A lot of people have lost their faith in the current monetary system,” he says. “And I think that cryptocurrency is a big alternative for those people.”

The family decided to make the gamble on bitcoin this summer, after seeing its swift climb this year. It’s already surpassed $5,000 a coin, and Taihuttu thinks it could quadruple by 2020. Tom Lee, head of research at Fundstrat, has made the same prediction.

In the last week, the value of outstanding bitcoin reached nearly $100 billion and surpassed the market value of Goldman Sachs. Some believe bitcoin’s value will reach at least $1 trillion in less than a decade.

But even with these kinds of returns, the fact remains, a speculative asset like bitcoin remains prone to seismic price moves in a very short space of time.

“We’re going through a revolution that’s changing the monetary system.”-Didi Taihuttu

Campbell Harvey, a finance professor at Duke University, says this kind of volatility is brutal. “We’re talking six times the volatility of the S&P 500 or five times the volatility of gold.” He says it has to do with the fact that this is new technology, “and it’s not easy to think about the fundamental value of a cryptocurrency.”

Those wild price swings are partly to do with the fact that cryptocurrencies aren’t backed by an asset. They’re valuable because people believe they’re valuable. In September, JPMorgan Chase CEO Jamie Dimon called bitcoin a “fraud,” and billionaire investor Howard Marks says bitcoin is a “pyramid scheme.”

Bitcoin’s volatility also has to do with uncertainty about government regulation. China and South Korea have enacted bans on new cryptocurrency sales. While the U.S. has yet to legislate hard and fast rules on bitcoin and other virtual currencies, the Securities and Exchange Commission warned in July that it might move to regulate new token sales.

Despite the heightened scrutiny and a lot of sleepless nights, Taihuttu says he remains a devout bitcoin enthusiast. “Money has to evolve, and it’s evolving now to cryptocurrency.”

The Yolo family

Source: Yolo Family
The Yolo family

Taihuttu’s strategy is risky. Adam White, general manager of GDAX, the largest U.S. cryptocurrency exchange, has said investors shouldn’t take on more than they can afford to lose. But Taihuttu’s motivation is about more than just cashing in on a big return; it’s about taking part in a revolution that’s transforming the world of money.

“We’re going through a revolution that’s changing the monetary system. … We are just lucky to realize that we are in the middle of it right now,” he says.

Digital assets like bitcoin or ethereum are built on a technology called blockchain, something experts believe is already changing the way we interact with money.

Part of why blockchain — the software powering bitcoin — is so powerful is because it cuts out the need for a middleman entirely. That means you don’t need a third party like a bank to clear your transactions. Instead, a decentralized network of miners all over the world handles the virtual accounting. The decentralization offered by blockchain also means that cryptocurrencies aren’t tied to any one country or government.

Some say this underlying technology holds even greater potential than the cryptocurrencies. For Taihuttu and his family that potential seems well worth the risk — even if it means having to all sleep in the same room.

“I was shocked,” says Taihuttu’s wife, Romaine. “I was like, ‘What the hell is bitcoin and crypto coin?’ It was a lot for me to handle. But then I got into it, and it made me believe it was a good change in our lives — for my children, for my husband, and for myself.”

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Trading

Here’s an Investment You Should Not Forget About

It’s pretty near impossible to build a growth portfolio without a very large weighting of technology stocks.

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Original Link : Investing Daily

It’s pretty near impossible to build a growth portfolio without a very large weighting of technology stocks. Look at any actively traded ETF containing the major tech companies like Apple (Nasdaq: AAPL)Amazon (Nasdaq: AMZN)Alphabet (Nasdaq: GOOG)Microsoft (Nasdaq: MSFT), and Facebook (Nasdaq: FB), and you are looking a collection of stocks that has vastly outperformed the major market averages over the past one-, five-, and 10-year periods.

All of these stocks have strong fundamentals and near monopolies or at least leading market shares within their realms. They will maintain this grip unless the government decides to step in (some whispering about this lately but nothing more) or the companies run into major competition from Chinese counterparts.

Moreover their valuations while not cheap are not frothy, either. In contrast to 2000, when Cisco (Nasdaq: CSCO) was trading above 100 times earnings, not even Amazon trades at a forward P/E of about 60, with growth in the mid-20s likely over at least the next several years. Amazon’s free cash yield is positive, about 3.5 percent based on expected 2018 values, and growing faster than earnings.

But we’re not here today to praise these great tech companies but to offer an alternative, an investment that in the long run may have more potential and where you don’t have to worry about government interference or Chinese competition. No, we haven’t discovered some miracle stock – rather, we’re talking about a miracle metal. It’s one that is vital in almost all technologies and that is running up against supply constraints just as the demand for technology, from blockchains to artificial intelligence to the Internet of Things, may be on the verge of a major extended growth phase.

Moreover, this miracle metal offers not just a way to play on tech but is also prized because it is inherently beautiful, resistant to oxidation, and a wonderful hedge against inflation. We are, you may have guessed, talking about silver. Silver, which has been used as currency for at least as long as gold – many thousands of years – is still valued as a monetary investment, with about 40 percent of yearly demand coming from investors. But the other 60 or so percent comes from its many industrial uses, which are on the threshold of accelerated growth.

In the 1980s no less an investor than Warren Buffett became the world’s largest holder of silver. Once it became news that he had amassed such a large position, he stopped reporting his silver holdings and presumably sold them. Still, Buffett’s rationale for buying the metal holds true today, to an even greater extent.

Buffett said he was buying silver because demand for the metal consistently exceeded supply. Silver has a number of remarkable properties that make it a critical part of many industrial applications. The metal is the world’s best electrical conductor – even better than copper – and also the world’s best conductor of heat. And as mentioned above, it is relatively nonreactive with oxygen, which is a major reason the metal maintains its properties over time.

This combination of characteristics has made silver an essential industrial and technology metal. The keyboard I am using to write these words has silver. My smartphone may have 0.35 grams of silver, and if I lived in a house that used solar power, silver would be critical to the photovoltaic modules providing my electricity. The auto I drive may have as much as 2 to 3 ounces of silver, depending on how many connections it has and the type of windshield heater.

The point is that silver’s properties, because they are simultaneously singular and critical, translate into many uses. And in world in which technology is becoming more pervasive; in which solar has become the fastest-growing renewable energy; and in which the number of nano-connections among objects is multiplying, the industrial demand for silver is certain to surge.

Right now, as has been true since at least the 1980s, demand for silver exceeds supply, and prospects for additional supply are limited. As I pointed out in a recent interview, above-ground stocks of silver – bars and coins purchased for investment purposes – have mostly accumulated in custodian vaults. The bulk of these supplies, around 1 billion ounces, or a year’s worth of production, is held in China.

Rather than use these supplies to make up for the current supply/demand deficit, it’s likely that China will continue to accumulate the metal. That’s because the country, with its megacities that go hand in hand with a burgeoning Internet of Things, its massive AI projects, and other technologies that have begun to drive the economy, will want to have on hand as much as possible of the silver that these technologies depend on.

The bottom line is that over the next several years, silver is likely to be in extremely short supply. I would not be surprised to see the metal climb to three digits by the early part of the next decade, and I sincerely doubt that you will find many tech stocks that will outperform.

 

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