Brian Gubernick argues the biggest investment risk is not letting compound interest work long enough. Missing just ten good days over twenty years cuts S&P returns from 9% to 2.5%. He bought a Scottsdale condo in 2008, sold it in 2011 at a loss, and it's now worth over $400k, showing the cost of interrupting compounding.
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Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast, where we believe that every day brings a new opportunity to get better. Today we're going to get better at wealth, we're going to get better at finances, we're going to talk about investment. Specifically though, we're going to talk about your biggest risk in investing may be in not preparing for the worst. Let's start though by talking about the 8th wonder of the world. What is the 8th wonder of the world? At least as defined by Albert Einstein, a guy that probably knows a few things. 8th wonder of the world is compound interest. Now, most of the NDO Nation probably familiar with, with compound interest, but let's briefly go through how it works. Okay. Here's a breakdown of how compound interest works in practice. You start with an initial sum of money. Uh, say it's in an account or it's in an investment vehicle. Then over time, that investment's going to earn interest. That interest is calculated based on the interest rate and how frequently it's compounded. So let's go through an example. Let's say we have $100, 6% interest compounded annually. So, so in year 1, we have $100 that earns 6%, so $6. So at the end of year 1, we have $106. But then in year 2, you have $106 that earns 6%, which leaves you with roughly $112. Then the next year, that $112 now earns 6%, and so the snowballing starts to occur as the principal grows. The interest calculated on, calculated on it in subsequent periods becomes larger and larger. And this compounding effect continues with the interest being reinvested and earning additional interest. It's a pretty amazing thing. Compound interest can significantly increase the growth of our investments over time. I think we know this, especially though, if you leave your money invested for an extended period. And ideally choosing investments with higher interest rates. So compound interest is fundamental. It's a fundamental concept in personal finance. It's a fundamental concept in investing. And it really, really, really shows up when you have a long-term mentality, when you're saving and you're investing for the long term. Charlie Munger, Warren Buffett's partner, He says the first rule of compounding is to never interrupt it unnecessarily. And it's a funny rule, but it is so darn true. And why am I talking about compound interest? If I go back to the original topic, your biggest risk may not be— may be in not preparing for the worst. Your biggest risk in investing may be in not preparing for the worst. I start with compound interest, the 8th wonder of the world. Because I think so many disrupt the effects of compound interest. As Charlie said, the first rule of compounding is to never interrupt it unnecessarily. Now, what do Warren Buffett and Charlie Munger have over everybody else? They have time because they've been on this planet longer, but they've also been very wise in time, meaning that Warren really never sells anything. He holds plenty of safe assets, even dull treasury bonds, even cash. And he's prepared for any sort of risky assets that, you know, he's prepared for his riskier assets that periodically and hopefully temporarily get slaughtered, but he doesn't care because he's got a long-term strategy. So number one, as we're talking around minimizing risk and preparing for the worst, arguably the greatest thing you can do is sit, is hold tight. There's example upon example. I'll give you one of my own personal examples. Uh, one I did not play well, one that many of you can relate to, but I remember buying a condo in North Scottsdale, 14000 North 94th Street, number 2172, a condo. I will, I cannot forget it. I paid about $195,000 for this property in 2008 or '09. In 2011, I short sold that property because I was upside down on it and it wasn't cash flowing because I wasn't smart and didn't, uh, didn't get, uh, buy a property properly such that I could hold it indefinitely without negative cash flow. But I ended up selling that property for $135,000. Now we all have stories like this, but guess where that property that I paid, you know, high $190,000 for a couple years later was worth $135,000. Guess what it's worth today? Its comp just sold for $410,000. So if I would have sat through the market crash, right? If I would have made it through the 2008, 9, 10, 11, 12 years, and held tight, if I had the ability to hold tight, that property over time, if I calculated it out today, it would have earned 6% to 7% year over year over year compounded. But I didn't have the staying power. I didn't have it mentally. I didn't have it, you know, financially. But the point I'm trying to make, and you go back to Charlie Munger's quote, the first rule of compounding is never interrupt it unnecessarily. And I had to interrupt that compounding of that investment vehicle. So time is your friend, especially as you battle, you know, in tougher scenarios. The key, making sure it cash flows. That's why I would never buy anything that doesn't cash flow, because anything you buy that doesn't cash flow isn't investing, it's speculation. And that's different. Now, speaking of time, And just to further this, uh, this strategy of combating, you know, the worst of the worst scenarios, playing the game, uh, for preparation for the worst, right? Talking about time. I'm not saying sit on the sidelines in fear or make rash decisions because of volatility, volatility in the housing market or the stock market, whatever it may be. The single biggest threat to your financial well-being is your own brain from time to time. To be successful, the best bet is to follow Warren Buffett's golden rule and have a long-term horizon to capture a compounding effect that others who tap out, the others who quit like me in that example, they lose out on. So this strategy means your asset allocation, your cash flow, your mindset, they're all designed to deal with short-term risks, risks. Again, the best way To prepare is to prepare for the worst. The bet— the biggest risk you may have is not preparing for the worst. So preparing for the worst means time is where I'm going with this. There will always be boom and bust. You cannot really time the market. Tony Robbins said— I was listening to him recently— he said 99% of the time, research will show 99% of the time, you can't time the market. And to prove his point in this interview I was listening to, He noted that the average return in the S&P, the S&P 500, over the last 20 years was 8.6%. So the S&P was almost 9% over the last 20 years. But if you were out of the market, if you had your money out of the stock market for just 10 of the best trading days during the period, your returns would have been only 2.5%. I hope you're listening to that. If your money was out of the market on the 10 best trading days over the past 20 years or so, your return— the S&P was at 8.6 to 9%. Your return would have dipped to 2.5% if you just missed 10 days out of 2 decades, out of 20, uh, years, 2 decades. So in summary, stop thinking that in order to get rich, You have to have the highest possible returns and take risk. That's not right. Actually, your objective is to minimize your chances of dying poor. These are two very, very different things. Now, don't get me wrong. There are times to be aggressive. There are times for things that, you know, to dive into things that maybe are a little bit higher risk, but I'm also saying be calculated. Have conservative investments and remember, minimize the chance of dying poor and allow the 8th wonder of the world to work for you. Hopefully this makes some sense for you today. I think the big focus has just gotta be on time. Make sure that you're positioning yourself well so that you can hold things indefinitely because as my friend Ben Kinney says, The best way to be broke is to sell assets that appreciate over time. It's a really good lesson. That's all we have for today, the No Days Off Podcast. Thank you so much for listening, and remember, every single day brings a new opportunity to get better. So let's get after it.
