Lesson 4 of 7
Compounding, and what time does
See what $1,000 becomes over decades at one rate, and why a loss needs a larger gain to recover than the one that caused it.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- At a fixed rate, growth compounds: the gain in year 30 is far larger than the gain in year 1, on the same rate.
- Time multiplies whatever rate you earn: at 7 percent, money roughly doubles every ten years.
- A loss and a gain are not symmetric. Recovering a 50 percent fall takes a 100 percent gain, not 50.
Money that compounds grows on its own past growth, not only on what you put in. Over long periods, a small difference in the rate becomes a large difference in money.
What $1,000 becomes at 7 percent a year
- After 10 years$1,967
- After 20 years$3,870
- After 30 years$7,612
- After 40 years$14,974
Time multiplies the rate
The bars above compound at the same 7 percent every single year, yet the gain in the last ten years, from $7,612 to $14,974, is $7,362, more than seven times the $967 gained in the first ten. Nothing about the rate changed. What changed is how much money the rate had to work with: by year 30 it was compounding on $7,612, not on the original $1,000. Over 40 years, $1,000 becomes $14,974 at 7 percent and $21,725 at 8 percent.
Compounding needs reinvestment
The chart above assumes every dollar of return is put back to work rather than spent. Spend the entire return every year instead, and there is nothing left to compound: the balance would still be $1,000 in year 40, exactly as it was in year 1, even though the rate earned was 7 percent the whole time. Reinvesting a return, not the size of the rate, is what lets a later year compound on more than an earlier one did.
Six decades, the real market
The same mechanics run on real markets over real decades. Berkshire Hathaway's own annual report tracks the S&P 500 with dividends reinvested from 1965 to 2025: a compounded annual gain of 10.5 percent, for an overall gain of 46,061 percent. That figure already assumes every dividend was put back to work, the same assumption behind the bars above. Ten and a half percent is not a remarkable single year. Held for sixty years, it is what an unremarkable rate can become.
A loss needs a bigger gain
Compounding runs in reverse too. A fall in value is not undone by an equal-sized gain, because the next gain is calculated on a smaller base. A fall of 50 percent leaves half of what you had, and getting back to the starting point needs that smaller amount to double: a gain of 100 percent, not 50. A single very bad year can undo what several good ones built.
Check yourself
At a fixed annual rate, is the dollar gain in year 30 usually bigger or smaller than the dollar gain in year 10?
- Smaller, because the rate never changes
- Bigger, because year 30 compounds on a much larger base
- Exactly the same every year
Show the answer
Answer: B.
The rate is constant, but the base it applies to keeps growing, so the same percentage produces a larger dollar gain later on.A $2,000 investment falls 20 percent. What gain, from its new value, gets it back to $2,000?
- 20 percent
- 25 percent
- 40 percent
Show the answer
Answer: B.
A 20 percent fall leaves $1,600. $2,000 divided by $1,600 is 1.25, a 25 percent gain from the lower base.Over sixty years, Berkshire's own report shows the S&P 500 with dividends compounding at what annual rate?
- 46,061 percent
- 10.5 percent
- 7 percent
Show the answer
Answer: B.
46,061 percent is the overall gain over the period, not the annual rate. The annual rate the table states is 10.5 percent.Sources
- Berkshire Hathaway 2025 annual report, table "Berkshire's Performance vs. the S&P 500", on the S&P 500 with dividends by calendar year, 1965 to 2025.
What this leaves out
- The $1,000 figure and its 7 percent rate are illustrative, chosen so the arithmetic can be checked by hand.
- The Berkshire table states 1965 and 1966 as years ended 30 September, and 1967 as 15 months. This lesson quotes only the table's two headline figures, as printed.
- The 10.5 percent is before inflation, fees and taxes: it counts dollars, not what they buy.
- Nothing here is advice about any security or a forecast of any future return.