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The Frightening Power of Compound Growth

The Buy part of Buy, Borrow, Die

Have you ever wondered how do the wealthy 1% generate income while paying little taxes? Turns out anyone of reasonable net worth can use the buy, borrow, die strategy. This article covers my version for the buy part.

Disclaimer: I’m not a financial advisor. These are just my opinions. Do your own homework, blah blah blah.

What BBD isn’t

A few weeks ago I asked a friend of mine if he’s ever heard of the “buy, borrow, die” financial strategy. He answered “you mean like the middle class?” I almost spit out my coffee!

What I found funny was that, he guessed it meant the middle class borrowing money to buy random things, then die with little to no assets.

The wealthy version of BBD is much better. Intrigued? Read on.

When you were in high school, you probably learned about compound interest rate in a savings account. We were taught early to save money, earn interest, and then rainbows and unicorns.

While there are some truths to that lesson, but realistically, what’s the current interest rate on a savings account? 0.1%? Money sitting in a savings account is literally losing value to inflation.

The stock market offers much better compounding, and it can grow into a real monster (in a good way).

Buy and Hold

In my experience, the path to success in the stock market is time and patience. It is literally planting a seed and watching it to grow to a tall tree over time.

I started buying TSLA shares in 2013. For this example, let’s say in 2013, you bought 100 shares at $50 for an initial cost of $5000. Let’s also say that you were bullish on the company and have held the stock since then.

Here’s the end of year price of TSLA for the last couple years. We will use it as a reference.

https://www.macrotrends.net/stocks/charts/TSLA/tesla/stock-price-history

Note that the Year Close prices are split adjusted. In late summer 2020, TSLA had a 5 for 1 split. So if you had purchased 100 shares in 2013, you would have 500 shares today.

Frightening Observation #1

By the end of 2013, the stock price has risen to $150 after a yearly 344% growth. The original $5,000 has grown to $15,043. Very impressive. Sell? No!

By end of 2014, TSLA grew another 47% on top of the 344%. The original $5000 is now worth $22,241. Time to take profit? No!

What happens then when those original split adjusted 500 shares are left alone till 2021? From an original $5000 investment? Make sure you are sitting down…

Yeah. It’s worth over half a million. Simply by holding, each year’s growth is compounded into the following year. Going from $5000 to $528,390 is a stratospheric 10,000% return over 8 years.

Frightening Observation #2

Even at a $1 Trillion valuation, TSLA is still a volatile stock. There are days it drops 5%, and days like January 3, 2021, where the stock jumps 13%. On Jan 3, TSLA gained just under $140 per share.

In other words, on Jan 3, you would have made $70000 from the original $5000 investment. IN A SINGLE DAY.

What’s the split adjusted original cost basis of the fictitious $50 shares? $10. A $140 gain from a cost basis of $10 is 1300%! IN A SINGLE DAY.

Of course, you can also lose big when the stock goes down, but at this point, you are playing with house money. But unlike a casino, the stock market doesn’t have the house advantage. By staying invested long term, YOU have the advantage of compound growth.

At $1100 a share, even a 1% daily change is $11, or about equal to the original $10 cost basis. With compounding, you can have daily swings greater than your entire original investment. Both good and bad, but in the long term, mostly good.

Frightening Observation #3

Let’s say you made the bold decision to accumulate TSLA when it was trading in the $150 to $350 range (pre split) between 2014 to 2019. That’s right. For half a decade, very few investors believed in TSLA. For argument sake, let’s say you bought 2000 shares for a total cost of $500,000 at an average price of $250 per share (pre split).

By 2021, the 2000 shares have split 5:1 to 10,000 shares. At $1100 a share, that $500K has grown into $11 Million! Welcome to the 1%.

TSLA can easily trade up or down 1% to 4% each day. Let’s take an average of 2.5%. What’s 2.5% of $11 million? $275K. That is more than the base salary of a Staff Engineer at Google. (Note that total comp including stocks and bonus is higher)

On Jan 3, TSLA went up by 13%, which in our example here, is $1.4M, or more than 5 years of salary of a Google Staff Software Engineer, in a single day. Granted, you would have lost most of it back in the next few days.

With compounding at scale, your daily gains (and losses) can be greater than your yearly salary. I call this reaching escape velocity.

Frightening Observation #4

Let’s go back to the 100 shares at $50 example. Let’s say you are still bullish about TSLA and decide to hold until 2030.

Elon Musk has said that he expects Tesla to grow production and deliveries at 50% annually. In case you didn’t know, Tesla deliveries soared by 87% in 2021. Meanwhile in 2022, two new Giga factories in Austin and Berlin are coming online.

In 2021, TSLA gained about 50%. Let’s half that for a 25% stock growth as a benchmark for the next 9 years. What happens then? Again, make sure you are sitting down…

The original $5000 investment would balloon into $4 million! Imagine if you had invested $500K.

A $7,800 stock price would put Tesla at a market cap of about $8 Trillion. If you’ve read my previous TSLA articles, you know that I believe this is in the realm of possibility, especially if Tesla delivers on the 20M annual vehicle production goal and launches Full Self Driving. If Tesla delivers on their robot, the ceiling would be even higher.

Frightening Observation #5

You might think that I’m just cherry picking TSLA as an example because it’s the obvious darling now, and that my projections are too optimistic for any company in the real world.

What if I told you that companies like Tesla are everywhere? Here are four companies that have significantly out performed Tesla in its lifetime. Tesla looks like a startup next to them.

https://www.google.com/finance/quote/TSLA:NASDAQ?comparison=NASDAQ%3AMSFT%2CNASDAQ%3AAAPL%2CNASDAQ%3AAMZN%2CNASDAQ%3ANVDA&window=MAX

There are lots of other companies that have done superbly well over their lifetimes. Google, Facebook/Meta, AMD, Netflix, Qualcomm, just to name a few.

The point here is that there are definitely companies out there that are in the early stages of growth, or existing companies that still have tremendous upside.

If you can find them, buy and hold, you too can be rewarded with insane compound gains. You don’t have to YOLO options like WallStreetBets or trade cryptocurrency/NFTs to achieve life changing wealth. Time and patience.

Buy great companies, hold, and compound forever. Do not ever sell!

How do you live off of unrealized paper gains if you don’t sell? Borrow.

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