Benjamin Graham, widely regarded as the father of value investing, asserted that the power of compounding is one of the most crucial concepts in investing. In his book “The Intelligent Investor,” he explained that compounding refers to the process of earning interest on the interest generated by an investment over time. Graham mentored Buffett while the latter attended Columbia University.
Concerning equity investments, Graham believed that compounding could lead to significant long-term gains. He argued that by investing in fundamentally sound companies with robust earnings potential and competitive advantages, investors could benefit from compounding as these companies grow and their stock prices appreciate over time.
Graham advised investors to concentrate on a company’s underlying fundamentals, such as earnings, dividends, and book value, rather than short-term market fluctuations. He believed that by purchasing undervalued stocks, investors could capitalise on the market’s tendency to eventually recognise a company’s true value, leading to a potential increase in the stock price.
Furthermore, Graham emphasised the importance of patience and discipline in the investment process. He believed that successful investing necessitates a long-term perspective and a willingness to hold onto investments through market ups and downs, allowing the power of compounding to work its magic.
In summary, Graham regarded the power of compounding as a key factor in equity investing, underscoring the importance of investing in fundamentally sound companies and maintaining a long-term perspective to harness this phenomenon.