The Power of Compounding.
Avoiding loss is rule one. Demanding a margin of safety is rule two. The third rule is the one that pays you for the first two: patiently let it compound. The chart below is what the third rule looks like in dollars. The gap between the market’s long-run real return and the rate a careful value investor targets is the entire game.
Chart 1 · The fan
$10,000 invested for 30 years, at five real rates of return.
Same starting capital, same horizon, five different annual returns. The curves stay almost touching for a decade. Then the gap opens. By year 30, a few percentage points of compounded edge become almost everything that matters.
The gap is the game. The S&P 500’s long-run real return is about 7%. Buffett’s stated hurdle rate — and this project’s charter target — is 15%. At year 30 those two compounded rates produce 8.7× different end-of-period wealth on the same starting capital. The gap is not small effort multiplied by time. It is compounded small effort.
Chart 2 · Doubling times
Every rate of return has a half-life. How long until $10,000 becomes $20,000?
The rule of 72 is approximate. The exact answer is ln(2) ÷ ln(1 + r). Doubling-time is the most useful intuition you can carry for compounding: 5 years at 15% is one double; 30 years is six doubles — $10K becomes 64×, or $640K.
4% real
17.7 yr
to double
7% real
10.2 yr
to double
10% real
7.3 yr
to double
15% real
5.0 yr
to double
20% real
3.8 yr
to double
Why the third rule is patience. Compounding rewards staying in the game far more than it rewards finding the perfect entry. The investor who earns 10% real for 30 years finishes ahead of the one who briefly earned 20% and then panicked out at year 15. Time in the market is not a slogan; it is the second factor in the exponent, and the exponent is what does the work. The corollary: anything that knocks you out of the game — a forced sale, a margin call, a deep drawdown you can’t stomach — resets the clock on the chart above. That is why the loss page and the safety page come first.