From Tom Dyson, publisher, Palm Beach Research Group: I love this picture.
It’s the best illustration of compounding I can give you.
Each year, the tree adds a new layer of growth… or a “ring.” Each ring has the same thickness… more or less.
But as the circumference of the tree grows, the volume (or mass) of wood the tree produces multiplies.
(A blue stain fungus caused the unique blue pattern in this southern yellow pine.)
In 20 years, this tree has increased the amount of its total wood volume about 100-fold.
Money grows the same way. Apply a 10% interest rate to a pile of cash and don’t touch it for 20 years (except to reinvest the dividends).
Like the thickness of the rings in the tree, the interest rate doesn’t change. It’s 10% per year.
But by applying that 10% to a bigger and bigger pile of cash each year, the “volume” of interest you generate grows.
In year 20, you’ll receive nearly seven times the interest you earned in year one.
The same principle applies to our Legacy Portfolio—except with the Legacy strategy, the principle is even more powerful.
That’s because our Legacy companies raise their dividends each year. Using the tree example, that means not only do we add a new ring each year, but those rings also grow wider.
It’s essential you understand this principle. Great companies that consistently raise their dividends are the most powerful wealth-generating force in finance.
We harness that force by accumulating larger and larger shares of these powerful businesses. Then we just sit back and let the wealth accumulate and grow.
(This is “part two” of our version of Buffett’s two-part method for generating enormous stock wealth. It’s the perfect strategy… and it will ensure a lifetime of stock investment riches.)