The Question People Ask Us
A reminder of the wonders of compounding
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People often ask us where the name Bristlemoon comes from. Part of the name derives from the classic compounding example, where you need to guess how many folds of a piece of paper are required before the stack of paper becomes tall enough to reach the moon. Have a go and guess a number. If you've never come across this example, the results will likely surprise you.
We know a few pieces of information:
A standard piece of paper has a thickness of 0.10 millimeters
The thickness of the paper doubles each time the paper is folded
The moon on average is 384,400 kilometers away from the earth
Put another way, how many times would the 0.10 millimeter sheet of paper need to be folded in order to grow to a size of 384,400,000,000 millimeters?
If you were to venture a guess, you would probably reason that the number of folds necessary to reach the moon would be very, very large.
You start folding the paper…
Folding it in half five times will get you to the thickness of two pennies stacked on top of each other.
Seven folds will get you to the thickness of a standard 128-page notebook.
10 folds and the paper will be the width of a human hand.
23 folds and the stack of paper will tower one kilometer high. This is taller than the Burj Khalifa, the world’s tallest building which stands at 830 meters.
30 folds and the paper tower will have entered space.
The sheet of paper needs to be folded only 42 times in order for it to be thick enough to reach the moon.
Yes. You read that correctly. 42 times. Such is the power of compounding in driving miraculous growth over time.
It should be noted that the record for folding a piece of paper is 12 times. However, with a piece of paper large enough, and with enough energy applied, you could technically fold the paper as many times as you want. Or could you?
If we continue the progression of the paper folding from when it reached the moon, the ensuing results simply become absurd.
81 folds will produce a paper mass 127,786 light-years tall, surpassing the disk-diameter of the Milky Way, which is roughly 106,000 light years across.
90 folds and the paper will span 130.8 million light-years in width, larger than the Virgo Supercluster. The Virgo Supercluster, estimated at 110 million light-years across, contains the Local Galactic Group – which houses the Andromeda and our own Milky Way galaxies – as well as more than 100 other galaxy groups. It is veritably massive, and its diameter can be dwarfed with just 90 folds of a piece of paper. This is truly incredible.
103 folds creates an impossibly large mound of paper. Literally.
The problem is that if you were to fold the paper 103 times, the thickness of the paper would grow larger than the observable Universe: 93 billion light-years.
Compounding Requires Time
The graph below is revealing. Up until the 36th fold it appears as though the paper will never reach the moon. This underscores a key point of compound interest, particularly as it relates to investing: it needs time in order to work. Investors overweight their focus on the yearly percentage return, and do not give due credit to the role time pays in generating wealth.
Below is perhaps the most important table as it relates to stock market investing (it is compulsory for Bristlemoon investment team members to have this stuck on their wall). Have a look at the compound interest table and observe what’s happening with the numbers. Do you see it?
What becomes clear from this table is that time is the far more potent ingredient in driving compounding outcomes.
While a high growth rate is obviously impactful, it can only contribute to a phenomenal compounding outcome if it is given enough time, and to have time you need to survive. This comprises the second part of the “Bristlemoon” portmanteau. The Bristlecone pine is the oldest surviving tree in the world, having been around for 5,000 years. By incorporating this concept of survival into our firm’s name, it serves as a constant reminder that incredible compounding outcomes are only possible if you can be around for long enough so that the magic of compounding can work.
We routinely underestimate the power of compounding
The human brain is ill-equipped to account for the effects of compounding and exponential growth. We tend to think linearly. When we think of growth, we usually mentally approximate that growth using a straight line. This is useful for dealing with changes in the real world that often unfold at a constant rate. When driving on a highway at a constant 100 kilometer per hour speed, the distance you cover is linear. Money, on the other hand, compounds. Its growth in dollars isn’t constant, but rather accelerates over time. As a result, when investing we must train our minds to think exponentially, not linearly.
This is not easy and does not come naturally. If asked to calculate 8 + 8 + 8 + 8 + 8 + 8 + 8 + 8, most will answer 64 if given a few moments. However, if asked to answer 8 x 8 x 8 x 8 x 8 x 8 x 8 x 8, most of us will be stumped. The answer is 16,777,216. The vast majority of people lack the mathematical ability to perform these calculations on the fly, relegating people’s estimates to at best a rough guess in the absence of any calculation aids.
As the interest rate and the investment holding period increase, the mathematical computations required to accurately calculate the effect of compounding become too complex for virtually all people to handle without the assistance of a calculator. This causes systemic underestimation of what the total investment value can grow to.
As Bill Gates once noted, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”.
While a post on the topic of compounding might seem trite and cliched, we believe it’s important to periodically remind ourselves what we’re shooting for as investors: tapping into the marvelous power of compounding.
Thank you for subscribing to our research and for following along on our journey as we build Bristlemoon Capital!
As a final note, we want to remind people that the Seed Class (Class B) units for the Bristlemoon Global Fund will be closing to new applications at the end of this month. The Seed Class of units is available to wholesale investors and benefits from material lifetime fee discounts. Enquiries can be made at info@bristlemoon.com.
Disclaimer / Disclosures
The information contained in this article is not investment advice and is intended only for wholesale investors. All posts by Bristlemoon Capital are for informational purposes only. This article has been prepared without taking into account your particular circumstances, nor your investment objectives and needs. This article does not constitute personal investment advice and you should not rely on it as such. This document does not contain all of the information that may be required to evaluate an investment in any of the securities featured in the document. We recommend that you obtain independent financial advice before you make investment decisions.
Forward-looking statements are based on current information available to the author, expectations, estimates, projections and assumptions as to future matters. Forward-looking statements are subject to risks, uncertainties and other known and unknown factors and variables, which may affect the accuracy of any forward-looking statement. No guarantee is made in relation to future performance, results or other events.
We make no representation and give no warranties regarding the accuracy, reliability, completeness or suitability of the information contained in this document. To the maximum extent permitted by law, we do not have any liability for any loss or damage suffered or incurred by any person in connection with this document.
Bristlemoon Capital Pty Ltd (ABN: 22 668 652 926) is an Australian Financial Services Licensee (AFSL Number: 552045).
George Hadjia is associated with Bristlemoon Capital Pty Ltd. Bristlemoon Capital may invest in securities featured in this newsletter from time to time.