"A Delayed Payment Is A Delayed Opportunity" -- August 22, 2023

Locator: 45446INV.

Time value of money, link here:

From wiki:

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Time Value of Money

I was talking with an amateur investor yesterday with whom I see every few months -- we have nothing in common, except as a sidebar -- talk about investing. I have no idea what is in his portfolio. I do know that he prefers mutual funds, and not individual stock picking. His background is, to say the least, not in finance, or business.

He is much younger than I (am), but his income is significantly more than what mine was at his age -- taking inflation and the "smaller" dollar into consideration.  He is still working, perhaps at the peak of his earning power, and his income is such, he says, the government / IRS won't allow him to take advantage of Roth IRAs (or traditional IRAs, either for that matter, because his company provides a pension of some time). 

Whatever.

I thought this was interesting: he said -- due to the time value of money -- he has probably invested for twenty years -- his investments have now grown so big now that whenever he has additional money to invest, "it does not move the needle."

I nodded my head, suggesting that I could understand that. And then we moved on.

Later, two things, came to mind.

First, if I have an extra $50 at the end of the month, I will find something that sells for less than $50 / share in one of my various investment buckets. I care not for slices, for the most part; some exceptions.  I prefer to by whole shares, even if it's just one share at a time.

And I buy a share or two. That investor with whom I was talking was correct. That $50 does not move the needle at all. But that investor forgets his own conversation about the time value of money. Over twenty years that $50 at 6% annually, that $50 will grow into $160. Over a year, $50 / month, that $600 will grow to around $20,000 over 20 years. Again, not much perhaps. But, now, to the second point.

Link here.

By the way, assuming an annual dividend of 3% that doesn't increase, and appreciation of 6% annually, that $50 / month grows to $36,000. [Folks can run their own numbers; I often make simple arithmetic errors.]

Second, finding a $25 / share stock, 24 shares / year, 480 shares over 20 years.

That $50 / month I will never miss, and my heirs won't care a bit how much that stock cost me, but if I had started buying two shares of AAPL every month twenty years ago, I would be thrilled with the 480 shares I would now have. "Worse," I started investing in 1984 -- 40 years ago -- so I guess I would have nearly 1,000 shares of AAPL. And twenty years from now, at two shares/month, I would have another 500 shares, or about 1,500 shares, accumulated with the equivalent of "pin money" that I wasn't going to spend anyway.

A delayed payment is a delayed (and in some cases, a missed) opportunity.

This seems like such common sense, but the investor with whom I spoke yesterday said it in a tone of voice as if he were now taking courses in finance and / or investing, and his professor talked to the class about the time value of money, something the students had not considered before.

In some respects, it's amazing that both Investopedia and wikipedia have articles on the subject, suggesting that it's an important concept missed by many.

And, or by the way, there are many "derivatives" that "fall away" from what seems to be a very, very obvious / simple concept.

For me, hearing that was like being a kid in a candy shop. It reinforced that spending $50 at the end of the month on two shares of "something" isn't crazy.

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Compound Growth

Link here.