Here’s how compound interest can make a $100 share into a $1,000 share. Make sure you know how to harness this 8th wonder of the world
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How does an ASX share turn $100 into $1,000?
That’s a good question. Returns are what we’re all here for, at the end of the day. We all invest our hard-earned money into the share market because we hope to get even more money back in the future. And it’s not exactly uncommon for ASX shares to give investors the kind of returns it takes to turn $100 into $1,000 either (That’s a 10-bagger return, or 900% if you want to get technical). Some ASX shares have given investors this kind of return in 2020 alone. Just think of Sezzle Inc (ASX: SZL). If you bought $100 worth of Sezzle shares on 23 March this year, that $100 would be worth around $1,790 today.
But how does this actually happen? Well, first things first. Short-term share gains like Sezzle’s are extremely uncommon – 2020 has produced a few of them only because we’ve had a massive share market crash this year. Investors who invested at or near the bottom of this crash have enjoyed gains not normally available on an ‘average year’ on the share market. And investors who make a full-time habit of chasing these kinds of returns usually don’t go home wealthy at the end of the day.
But it’s still possible to turn $100 into $1,000 using ASX shares, even if it doesn’t happen in the space of 6 months.
A compounding miracle
How this happens is through the miracle of compound interest. Compound interest is one of the most misunderstood, yet powerful, forces you can harness in the world of investing. If an ASX company can grow its earnings at 20% per annum for 10 years, it might sound ok to your ears. But picture this: if a company that might have earnings of $50 million in 1 year, and grows this figure by 20% each year for 10 years, will end up with earnings of $310 million. If it continues this growth streak, even at a lower rate of 15% for another 10 years, it will be pulling in $1.25 billion.
Now, let’s assume that you bought $100 worth of this company’s shares and the shares trade at a consistent price-to-earnings (P/E) ratio. It would then take 14 years to turn your $100 worth of shares into $1,000. That might not sound like too much of a big deal. But the maths is the same no matter the amount. Say you had $1,000 initially invested in our wunderkind company. After 14 years, this would be worth $10,000. And if you had $10,000, then 14 years later you’d have $100,000. $100k? $1 million. You can see how quickly this would add up.
If you were lucky enough to have been invested in a company or 2 of this kind of calibre, you would be extremely wealthy before you knew it. Investing is about discipline, and accepting that compound interest will make you rich if you give it enough time. No wonder Einstein reportedly described it as the ‘8th wonder of the world’.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia has recommended Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.