Compounding

What it is\nWhen a return is reinvested rather than spent, the next period's return is calculated on the new (larger) base — gains earn returns of their own. The longer this runs, the more the curve bends upward.\n\n## The math, made visceral\n- $10,000 at 7%/year for 10 years = $19,672\n- $10,000 at 7%/year for 20 years = $38,697 (almost double the 10-year result)\n- $10,000 at 7%/year for 30 years = $76,123\n- $10,000 at 7%/year for 40 years = $149,745\n\nThe last decade alone added more dollars than the first three decades combined. That's the geometry of compounding.\n\n## Why Buffett refuses to interrupt it\nBuffett: "The most important thing is that you don't interrupt the compounding." Selling early — even to "lock in gains" — resets the base. Capital gains tax further reduces the reinvestable base. The discipline of holding through volatility is what separates compounding-aware investors from traders.\n\n## What kills compounding\n1. Overpaying — high entry P/E means decades of underwhelming returns even on a great business\n2. Selling too early — locks in tax + restarts the curve\n3. Permanent capital loss — a 50% drawdown requires a 100% gain to recover\n4. Inflation > return — a real return below CPI is decompounding