What happens when you push a small snowball down a hill… And what does this have to do with growing wealthy?
When you push a small snowball down a hill, it continuously picks up snow. When it reaches the bottom of the hill it is a giant snow boulder.
Source: Calvin & Hobbes
The snowball compounds during its travel down the hill.
The bigger it gets, the more snow it packs on with each revolution.
The snowball effect is a metaphor for compounding. It explains how small actions carried out over time can lead to big results.
This article shows how to harness the power of the snowball effect to multiply your wealth and income many times over.
It also includes 7 real world examples of the ‘snowball effect’ stocks that have compounded investor wealth.
The Power of The Snowball Effect
Before we discuss how to harness the power of the snowball effect we must understand the power of compounding.
The snowball metaphor visually shows the power of compounding.
“The most powerful force in the world is compound interest”
– Attributed to Albert Einstein
Here’s the power of compound interest:
Imagine you invested $1 that compounded at 1% a day. In 5 years your $1 would grow to over $77 million. You would be the richest person in the world by year 7.
Keep in mind that compounding is not a get rich quick scheme. It takes time – and lots of it. There are no investments that compound at 1% a day in the real world.
The stock market has compounded wealth (adjusting for inflation) at 6.9% a year over the long run. At this rate an investment in the stock market has historically doubled every 10.5 years.
It takes more time to compound wealth in the real world – but that doesn’t make the principles of compounding any less powerful.
Warren Buffett compounded his wealth through a specific type of investment.
Specifically, Buffett invests in:
1. Shareholder friendly businesses
2. With strong competitive advantages
3. Trading at fair or better prices
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
– Warren Buffett
The next section of this article discusses how to harness the power of the snowball effect by investing in the same type of businesses Warren Buffett does.