To this day, there remains a common misconception among the general public that investing and playing the stock market is merely a game of chance where you can only lose. This is clearly not true; at most, such a claim could apply to day trading, where luck indeed plays a major role in success. However, the average person who considers themselves an investor should not rely on luck. Instead, they should utilize the knowledge and rationality they have successfully gained over the years and forget about the luck factor entirely—you cannot build your wealth on it.

So, why is it that luck does not determine investment success? Beginner investors typically fall into the trap of overestimating market timing, constantly searching for the perfect moment for buying and selling points. They focus on whether the market is currently at a peak or in a trough. Experienced wealth builders—the true investors—are well aware that in the stock market, time is our friend. This overwrites the importance of timing; more specifically, it makes timing redundant. In this article, we examine how compound interest actually works and how we can utilize it when making our investment decisions.

The essence of compound interest is very simple: it is not only our initial capital that generates returns, but the returns already generated also produce further returns. Imagine purchasing $10,000 worth of, say, a stock, where the underlying company achieves an average annual return on equity of 10%. In the first year, it generates a return of $1,000 for us, meaning that in the following year, $11,000 in capital will be generating further returns. By the end of the second year, our return will be $1,100. Projected back onto the original capital, this already represents an 11% annual return. In the first few years, this might seem like modest growth, but over a longer timeframe—say 10, 20, or 30 years—it translates into significantly larger growth. Just consider that a 10% annual return doubles the amount of annual yield relative to the original invested capital in just 8–9 years: by the 9th year, we will have an annual return of $2,144, which translates to a 21.44% return relative to the original $10,000. Furthermore, the total accumulated return during this period will be more than double our initial capital: $13,579.

Obviously, to enjoy the effects of compound interest, thorough consideration is required to select the right company that will perform well over the long term at the right price—preferably at a share price below the firm’s intrinsic value. This type of investing provides a reassuring peace of mind and does not require constant attention; we can comfortably enjoy the fruits of our investment and build a relatively stable stock portfolio that steadily grows thanks to the power of compound interest. We don’t have to worry about current market news, share prices, or the prevailing market environment. When we find a good buy, we purchase it and simply wait—preferably to buy even more of it—since, if we made the right choice, we will never want to sell our package of shares.