The dictionary has many definitions for Compounder, depending on de context. The definition that best fits our context here is: “To compute (interest) on the principal and accrued interest.”
Here at the blog, I like to use two definitions of the “Compounder”: Compounder as in the process and Compounder in companies as I believe that the best way to get good returns over time is by investing in Compounder Companies.
Compounder process
The compounding process is very similar to the definition given by the dictionary above. But a better one is defined in Investopedia:
“Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods”.
This graph shows an example of the compounding process. If you invest $500 a month, starting at age 25 and compounding at 8% per year, at age 59, and could be worth more than $1.7 million.
Compounding Effect. Source
So, for having the compounding effect on your investments, you just need to SAVE, INVEST, REPEAT. Of course, you have to find an investment that returns your desired return, but that is another big topic.
The most important is letting the time do the compounding effect. As Charlie Munger says: “The big money is not in the buying or selling, but in the waiting.”
Compounder Companies
Now that I know what the Compounder as process is, the compounder in companies is straightforward.
Here, I like the definition given by Morgan Stanley:
“We define compounders as companies with high quality, franchise businesses, ideally with recurring revenues, built on dominant and durable intangible assets, which possess pricing power and low capital intensity”
Is a good definition, but I simplify it, here is our version of the definition of Compounding companies: We define compounders as companies with high quality that have a sustainable competitive advantage and are able to enjoy sustainable, high returns over a long period of time.
The ability to have a sustainable return over time - and of course, reinvest it - make it a good return on the investment.
Notice that I talked about companies, not stocks. The stock is the means to be part of the company.
Happy investing!