The Frugal Farm Living life deliberately

Ok, everything I've posted so far is pretty self-explanatory (and after all, no one ever said finance is rocket science). But here's the thing. For the first 10 years after college I invested almost exclusively in growth stocks. But do you ever really get compound growth in growth stocks? (And there is one way you do, but tends to be rare and unpredictable).

Here in Idaho JR Simplot is a pretty famous guy. Simplot is the man who modernized potato processing. A Billionaire, and was the primary funder and major shareholder of Micron. At any rate, how he got his start is somewhere between reality, myth, and legend, but the story that gets repeated is loosely along the following lines : JR as a teenager ended up with a couple head of cattle. (2 cows for the laypeople among us). He had these cows bred and they produced young. Now rather than selling out and taking his profits, he realized with exponential, compounding growth (every cow produces 1-2 young a year and those are ready to produce 1-2 young in 1-2 years after that), he could build an enormous herd worth a vast fortune and live off a portion of the proceeds of the heards annual growth.

It is compound interest at its finest. And a teenage farmboy from idaho got it. Of course, 100% return is pretty rare in the world of dollars, and the cattle market can be volatile, but in terms of cattle, you can really get 100% annual returns compounding. And interest is most accurately measured in the units it is paid in - dollars on dollars in the bank. Calfs in Cattle in the field. And Shares when dealing with stocks.

Back to stocks: - so, in the strict sense of compound interest, do growth stocks compound? No. And although every financial planner will tell you about compound interest as the key. And most will proceed to push one toward growth stocks. You just 'can't get there from here'. You don't get compound growth from growth stocks expect in stock splits. You see, when you buy a great growth stock, and 10x your investment, and it falls, you still have the same number of shares. No growth. No sold at the right time, they could be converted to money, and one can calculate a return - but it isn't a compounding.

So, everyone agrees (most everyone anyway) agrees stocks are a good place for money, but everyone also knows you need compounded returns - simple returns don't get you there, so where to go? (another blog entry to come -- but any thoughts? too deep? too obvious? )