Smaller Things Grow Faster

by Jason Hommel, June 19, 2006.

One of the most important investment principles that I've ever discovered is this:

Smaller investors have the greatest advantage of all, because they can grow their money the quickest; but big money grows the slowest.

In other words, acorns can grow into big oak trees, but big trees cannot grow to the moon.

For example, you can buy a soda for 50 cents, and sell it later that same day for $1.00 on a hot day, and make 100% in a single day! But the next day, you’d have to sell 2 sodas, then 4, 8, 16, 32, 64, 128, etc. But that kind of work might not be enough to pay the rent, and that kind of growth is unsustainable. Within a week, you have a job that’s too much for you, and you have to give up some of your gains to hire workers or buy vending machines to keep selling soda. Or, the season will change, and you can’t sell any soda if it’s not a hot day. Or, you’ll have to get a permit to sell that much soda. Or, you’d fill the needs of the market, and not be able to increase sales day after day. Or, competitors will show up, and you’ll sell less.

The former generation of investment advisors will typically tell you what I consider to be half-truths when it comes to compounding your money. They will say that if you save $10,000 by age 18, and never again add to your savings, and if you are able to compound it at 10% per year, than you can retire as a millionaire by age 65. This is true, factually true. You can grow 100 fold in a lifetime, at 10% per year.

But what good is a million dollars if there is hyperinflation, and a loaf of bread costs $10,000 in 40 years? The real truth is that you not only have to earn 10% per year, but you have to earn 10% more than inflation each year! If inflation is roaring along at 7% in consumer goods, you need to earn 17% per year! And if they are creating new money at a rate of about 15% per year (which is close), then you need to grow 25% per year! Or, if years of prior inflation show up all at once, you may have to do better than 50% to 100% per year!

Furthermore, it is terribly misleading if you end up thinking that you should grow at no more than 10% per year, if 100% to 1000% is more realistic for you!

Fortunately, if you are a small investor, you can grow your wealth by 100% per year, or better! (After all that’s merely a doubling, or a 2 fold return.)

Issac grew his wealth 100 fold in one single year; from simple farming!

Genesis 26:12 Isaac planted crops in that land and the same year reaped a hundredfold, because the LORD blessed him.

Large investors, on the other hand, have great difficulty growing so fast, or outperforming the market. You can prove this to yourself on an excel spreadsheet: If you invested 1 oz. of gold 6000 years ago, and compounded it at ¼ of 1% per year, then you’d own more gold than has been mined in the history of the world, over 6 billion ounces, which is obviously impossible. If you grew your ounce of gold at 2% per year, over 6000 years, you’d own all the atoms in the universe, all of it would be gold, and all of it would belong to you. Clearly, that kind of growth rate, 2%, is impossible—for the largest money to achieve over long periods of time.

In fact, the largest money cannot even grow more than ¼ of 1% per year. And if it does, then it must have corresponding years of losses to make up for it, just like a mature oak tree cannot compound its way to grow to the moon.

This math proves, beyond a shadow of a doubt, that it is impossible for “the rich to grow richer, and the poor to grow poorer”. In actual fact (and even a casual look at history shows this to be true) the poor grow rich fastest, and the rich have to always struggle, just to maintain their wealth. And more often it seems, people who inherit wealth squander it. As it is, the USA seems to be squandering its wealth, too, neglecting to invest in gold and silver (and possibly even secretly dumping the Treasury's gold), whereas India and China, the poorest nations on earth, are making the best investment decisions; to buy gold and silver!