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Anything with some kind of returns that you can put back into it will exhibit compounding interest. True of real estate or stocks or even just bank deposits. Ev

Anything with some kind of returns that you can put back into it will exhibit compounding interest. True of real estate or stocks or even just bank deposits. Even if a stock price goes nowhere but pays a 5% dividend (I'm looking at you, RDSA) It is trivially true in real estate (Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population.) Why wouldn't it be true in a market where the returns have been higher than real estate?

didibus 8y ago
> Anything with some kind of returns that you can put back into it will exhibit compounding interest This is only true if you play the market though. Just holding on stock is not a compounding interest rate. I might be wrong, but that's my impression. If I buy 1000$ of stock this year and make 10% return. At the end of the year I have 1100$. Now the next year, I need to make 10% off of 1100$ to be compounded and end up with 1210$. Now if I hold onto my same amount of stock. If I end up with 1210$ the second year, that's not due to compound interest, but simply to good performance in the stock which grew by 21% in two years. Effectively allowing it to grow at an annual return rate of 10%. To be compounding, I would need to sell my shares after year one. Thus pocket 1100$. And buy 1100$ worth of shares which again would make 10%. I mean, in effect it's the same. If the shares truly grow by 10% year over year. But the point I'm making is that your ownership in total number of shares does not grow. So if I had 100 shares at 1000$ out of a total of 10000 shares, I still have 100 shares but they are worth more at 1210$. So as you see, over time, I don't grow at the expense of others in my total ownership. Thus I feel this does not explain how 10% can own 84% of all stocks. It would be true, if people play the market in a way that, every year, they sell to buy cheaper stocks, thus growing their share count. And it turns out the companies whose share they held prior years all go bust. Then they'd progressively own more and more at an exponential rate.

didibus 8y ago

> Anything with some kind of returns that you can put back into it will exhibit compounding interest This is only true if you play the market though. Just holding on stock is not a compounding interest rate. I might be wrong, but that's my impression. If I buy 1000$ of stock this year and make 10% return. At the end of the year I have 1100$. Now the next year, I need to make 10% off of 1100$ to be compounded and end up with 1210$. Now if I hold onto my same amount of stock. If I end up with 1210$ the second year, that's not due to compound interest, but simply to good performance in the stock which grew by 21% in two years. Effectively allowing it to grow at an annual return rate of 10%. To be compounding, I would need to sell my shares after year one. Thus pocket 1100$. And buy 1100$ worth of shares which again would make 10%. I mean, in effect it's the same. If the shares truly grow by 10% year over year. But the point I'm making is that your ownership in total number of shares does not grow. So if I had 100 shares at 1000$ out of a total of 10000 shares, I still have 100 shares but they are worth more at 1210$. So as you see, over time, I don't grow at the expense of others in my total ownership. Thus I feel this does not explain how 10% can own 84% of all stocks. It would be true, if people play the market in a way that, every year, they sell to buy cheaper stocks, thus growing their share count. And it turns out the companies whose share they held prior years all go bust. Then they'd progressively own more and more at an exponential rate.