Compound interest has been described as the eighth wonder of the world. Suppose you compound $10,000 at 50pc for 12 years you would end up with $1,297,453. The power of compound interest has made Warren Buffett so rich. It doesn’t happen to most people because they don’t allow it to happen. Buffett combined patient investing, good timing (he began roughly when the post-war equity boom began) and extreme personal frugality (he still lives in the same house he always lived in) to accumulate a vast fortune.
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It is never too late to harness this power for your investing. I have been thinking the unthinkable about QQQ3. The ETF was launched in December 2012 at around $3 adjusted for share splits. In 2021 it reached around $280, a rise of 90 times. Most of that rise was driven by the boom in technology and the rise to prominence of a group of US shares known as the Magnificent Seven.
We had a massive correction in 2022 driven by a spike in inflation and a sharp rise in global interest rates. Although interest rates have yet to fall the bull market has resumed. I would argue that this time around the fundamentals, AI and all that, are even more exciting.
QQQ3 Could Reach $5,000 by 2030
It therefore seems reasonable, though hard to imagine, that QQQ3 will compound at the same rate over the next decade as it did between 2012 and 2021. If it does we are talking about the price reaching somewhere between $4,000 and $5,000. That is the power of compound interest.
It sounds unthinkable but a decade or two ago some guys wrote a book predicting that the Dow Jones would reach 40,000. Everybody agreed that this was a ludicrous piece of hype. At the time the Dow was around 7,000. A few days ago the Dow Jones index came within a whisker of 40,000 and in performance terms it has dramatically underperformed indices like the Nasdaq 100.
Miracles do happen in the stock market.
Fundamentals Even More Exciting This Time Around
I think progress could be even quicker this time around because the forces driving the boom are so much greater. The R&D spend of corporate America is unimaginably higher than it was when the Dow Jones was 7,000. Compute power is exploding as is the amount of data being generated and collected in an increasingly digital world.
If I were guessing, which I am, I would expect QQQ3 to reach between $4,000 and $5,000 by 2030. This is a compound rate of appreciation of around 85pc. A broad rule of thumb is that QQQ3 outperforms QQQ and the Nasdaq 100 by between five and 10 times. This means the Nasdaq 100, which is around 19,000 would need to reach around 50,000, which it would do if it compounds by 20pc a year or maybe even less.
Maths was not my strong point in school so feel free to check my calculations and let me know if I have gone wrong.
The net effect of all this is that I am beginning to think the unthinkable about QQQ3. Between 2012 and 2021 it went up 90 times. Since then the pace of technological change has accelerated and is still accelerating. Even if we don’t try to put numbers on the target it seems reasonable to imagine that QQQ3 could be massively higher in five years.
Here is the chart which looks bullish. Bear markets, periods of falling prices marked in red on the chart, are very much against the grain. The direction of travel is up and the angle of ascent is steep. And we have a story. Generative AI is already triggering explosive growth in sales and profits. It will need the biggest investment boom in human history to make it happen. Humanity needs to be able to perform miracles to deal with climate change, exploding global populations, rogue states like Russia and much else besides.
Even evolution may be helping. Back in the Stone Age, Dad and Grandpa had accumulated wisdom and could show the youngsters what to do. Now it is the other way round. The old-timers turn to the young to find out how to do stuff and even then we don’t understand. If Walt Disney came out of deep freeze into this world he would be stunned. Mind you blondes still seem to be as dumb as ever so he would be reassured that not everything has changed.
We may not have much of a clue what is going on but at least we can buy shares in the people who do.
Another wild card is share buybacks.
Global share buybacks surge to a record $1.31 trillion almost equalling dividends … Share buybacks have soared to a new record almost matching dividends in 2022 .
Janus Henderson Investors
They have tripled in value in 10 years and are becoming an increasingly powerful engine of share price appreciation as companies, especially in the US, generate a tidal wave of free cash flow.
Strategy – Buy Some QQQ3 Every Month
QQQ3 or the London version, LQQ3, is not only in a strong uptrend but it is extremely volatile. This is perfect for a programme of £-cost averaging. Buy some shares every month. Keep plugging away and you will get your reward.
Share Recommendations
Wisdomtree Nasdaq 100 x 3 Daily Rebalanced. QQQ3. Buy @ $204
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The Living Portfolio – Manage Your Shareholdings For Maximum Results
Quentinvest Alert – Vertiv Holdings
