The Power of Compounding

Long-term investing is significantly influenced by the power of compound returns, which can lead to wealth when combined with time. Roy Leckie, a co-chair at Walter Scott, emphasizes that investing should focus on multi-year horizons rather than short-term gains, as many investors today prioritize quarterly results. David Dredge also discusses the technical aspects of compounding, illustrating how returns can appear misleading when viewed through a narrow timeframe. Understanding the difference between arithmetic and geometric returns is crucial, as ignoring the effects of compounding can lead to serious financial miscalculations.