Warren Buffett's secret: compound interest
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Warren Buffett's secret: compound interest
Market Insights
July 8, 2021

Warren Buffett's secret: compound interest

It's one of Warren Buffett's showpieces: compound interest. The principle of return on return. But how does it work, and how can you invest with the compound interest principle yourself? We'll explain and provide you with an example calculation with one of our most popular bots!

Starting with investing and Warren Buffett

When you just start your investment journey and do your research on the subject, you’ll come across the name of Warren Buffett pretty much straight away. Buffett is an American businessman and investor with an estimated net worth of $73 billion. Yes, you read that right. When asked about the secret behind the success of his investments, his answer is always the same: compound interest — the principle of return on return.

What is compound interest?

Now that the savings rates are almost 0% or even heading towards the negatives, saving has become a lot less lucrative than it used to be. The days of making money on a savings account are in the past, and if you’d include inflation, your money would even decrease in value every year that passes.

So what’s the alternative? Well, if you ask Warren Buffett, the answer is simple: investing. As described by the man himself, compound interest is the only way to increase the value of your money.

What’s up with that?

How compound interest works

Well, let’s dig in, shall we? When you invest, you get a certain return (profit). Let’s use the AEX as an example. Over the past ten years, the average return on the AEX has been approximately 10%. This means that your money will be worth 10% more with each year that passes. So if you were to start with €100, this would grow to €110 after your first year. In the second year, your return is 10% on €110, and your money is worth €121. And this goes on for years: you always receive your return on your previously achieved return.

This principle is called compound interest. In other words, compound returns.

Investing for the long run

A second “secret” of Warren Buffett is the period in which he invests. In his opinion, there’s no way to make quick money: especially not when you work with the principle of compound returns. As the market constantly fluctuates, you will always encounter declines — called dips in the market. These dips will always occur, and if you’re investing yourself, it’s important not to panic when your investments drop into a dip. Historically, the market has always recovered and been profitable in the long run.

And if you’d ask Warren Buffett, the longer you leave your money be, the bigger your returns in the long run!

Investing with BOTS

One of the significant advantages of investing using the BOTS app is that the bots aren’t as affected by these dips as people are. Since the bots have been created based on machine learning, artificial intelligence, and algorithms, they can evade dips or at least mitigate their effects. Bots perform automated trading strategies, which is how they can see drops coming and avoid them. In doing so, the bots will get you the best possible return.

BOTS and compound interest

And just like Warren Buffett, you will be able to let the return work for you. In the BOTS app, you will find several bots with their own strategy and corresponding risk tier. You can decide for yourself which bot you would like to use to invest money. You also have the option of using multiple bots.

One of our most popular bots is The Power of Pi, a bot whose strategy is based on the number pi. Since the bot was launched, its average return has been slightly over 5%. The Power of Pi is in risk tier 8, on a scale from 1 to 12.

So if you invest €1,000 using The Power of Pi, it will be worth €1,050 after one year. If you keep investing this amount, it will be worth €1,102.50 after two years. If you keep it up for ten years, your €1,000 will have become worth €1,628 by that time.

If we were to calculate this using an average return of 10% (like the AEX index has yielded over the past ten years) your €1,000 would have become worth that much more. To be precise, it would be worth €2,593 after ten years.

Invest like Warren Buffett

To conclude, you are now able to invest just like Warren Buffett. Perhaps it won’t be with billions of euros simultaneously, but the principle of compound interest will help you build up capital in a similar way. And by using the BOTS app to invest, you are well-equipped to avoid dips in the market as much as possible. And that is one advantage Warren Buffett didn’t always have.

There is no such thing as risk-free trading. It is possible to lose (part of) your stake.

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