Pod Insights Talking Wealth Podcast: Stock Market Trading and Investing Education | Wealth Creation | Expert Share Market Analysis The Big Lie About Compounding and Building Wealth About this episode Compounding is one of the most overused and misunderstood terms as many investors have been sold a misleading story about how it really builds wealth. Join Dale as he challenges the myths surrounding compounding, reveals how it actually works, and explains how you can harness its true power to accelerate your wealth-building journey.
Transcript 0:01 Speaker 00 This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice. Enjoy.
0:19 Speaker 01 Compounding is probably the most overused word in investing and perhaps the most misunderstood. And everywhere you turn, someone is talking about the power of compounding. We get ETF providers talking about it. We get fund managers and financial advisers talking about it. Finance influencers on social media talking about it. And apparently, all you need to do is buy some investment, like an ETF, sit back and do absolutely nothing and let compounding work its magic. Simple? Well, or is it? Or is that even the right way of talking about compounding now? Because the more I hear people talk about compounding, the more I wonder whether we're all talking about the same thing. You see, I was taught when I was
1:02 Speaker 01 very young that when you put money in a bank account and it earns interest, and then you get a benefit of interest on that interest, that's compounding, as I know it anyway. Now, banks know this process all too well, and that's why they make shed loads of money. Now, let's apply this theory to the stock market. When dividends are reinvested, those dividends generate more dividends, and that's compounding. It's pretty simple, really. But what about a share price rising from $100 to $200? Is that compounding? Or is something completely different happening? What about active investors and traders in shares? Is that compounding? What about business owners or property developers? Can
1:44 Speaker 01 they compound money to generate more wealth for themselves? Here's another question. What about people who buy an ETF and hold it forever? Are they compounding? Well, today I want to challenge one of the most widely accepted ideas in investing. That may actually be misleading to many investors. And I also want to challenge it, not because compounding isn't powerful, because it is extraordinarily powerful, but because I think many investors have been taught to think about compounding in totally the wrong way and the financial industry want people to think that way. Welcome to Talking Wealth, I'm Dale Gillam, I'm the chief analyst here at Wealth Within and I've got 30 odd plus years' experience in the stock market investing and wealth
2:28 Speaker 01 generation and to me, you know, understanding this concept is so critical. I've never done a podcast or anything on it, but I was having a chat with AI only recently and I started talking about compounding and AI was giving me all these answers that were just wrong or not quite right, if you can get my drift. And to me, that's just not good enough. So I started questioning the AI and then the AI was coming back to me going, well, no, this is how it works. And I go, no, how does it work that way? Because that's wrong. And this is this and this, how you're compounding this and how you're doing that. And the more I questioned it, the more it started to understand what I was getting
3:10 Speaker 01 at and actually starting to agree with it and actually telling me that, well, yeah, the industry, all the financial services industries can be misleading in how they use the word compounding or misleading people into thinking they are actually compounding when they're not. Now, the thing is that if we misunderstand where our wealth building capabilities actually come from, we risk focusing on the wrong things. And today I really did want to make, or really wanted to fix this so you can make more informed choices for yourself as to how you invest and how you generate wealth for yourself. And as I said, you know, welcome to Talking Wealth. You know, with 30 years of experience investing and trading, mentoring, teaching people like
3:53 Speaker 01 you about the market, I think I'm infinitely qualified to be talking a bit about compounding. So today I really did want to dispel and discuss those biggest myths about compounding that if you understand it. Will absolutely dramatically change your wealth creation abilities. And I'm sure that's what you all want. And why you're listening to our podcast is how do I do this better. But let's get down into what is that cult of compounding that everybody thinks they've joined, which I'm not necessarily thinking that they have actually joined or they've got a misconception about it. Because compounding has become an almost mythical concept and making us believe it's something quite powerful. You know, spend enough time reading investment books or
4:33 Speaker 01 watching finance videos on YouTube and everywhere else. And you see those finfluences regurgitating the same old stories that you could have be forgiven. They're thinking about or talking about compounding and they're talking about it as some sort of financial superpower. Now, compounding can be part of all of that for us. However, many investors mistakenly think they are compounding when they are not. And a lot of those finfluences that I see, as I said, on YouTube and social media, when they talk about compounding, they're not actually talking about compounding. They don't actually understand it. And they don't have that 30 years experience that I have
5:13 Speaker 01 and coming from the financial services industry. But they also don't ask, why is this or so? And they don't question things. They just repeat what they've seen from some other financial influences. So you've got the blind leading the blind, so to speak, or same same, but different person, if you get my drift. And many investors treat compounding as though it's a strategy, simply buy, hold, wait. But that's not compounding. Then you become wealthy, right? Just buy, hold, wait, and you become wealthy. Well, simple, yeah. But no, it's not how things work. The problem is that compounding itself doesn't decide whether you become wealthy. The quality
5:54 Speaker 01 of the asset you buy matters. The timing of your investments matter. The quality of investment decisions matter. If you're buying quality stocks, and the quality of the underlying business matters, yet.
6:09 Speaker 01 These parts of the conversation are often ignored by these so-called experts. Instead, we hear, "Start investing early." "Stay invested." "Don't try and time the market. Don't touch your money." Now, whilst there's some wisdom in some of those statements, you know, "Start early." Totally agree with that. "Stay invested." Yeah, but not every single day of every single year of every single decade. You know, "Don't try and time the market." Don't agree with that one. "Don't touch your money." Agree with that one, because you can't compound if you keep pulling money out and using it for other purposes other than generating your wealth. Now, as I said, so whilst there are some wisdom in some of those statements, I don't fully agree with them, but they don't actually explain what compounding is. And really, they don't even have much to do with that compounding.
6:55 Speaker 01 Yeah, look, I totally agree that the earlier you start the investing, the better, as I said a second ago. But, you know, staying invested assumes you never sell. And that's what they're implying when they say, "Stay invested. Don't sell." And this is one I really don't agree with, as it really does stop you from compounding, which I'm going to explain to you later. Now, I have a lot of podcasts and blog posts that talk about this as well. "Don't try and time the market." This is another I disagree with. And again, it stops you from compounding. And yes, we've had lots of, or we do have lots of resources in our website around this subject too, with videos, podcasts, blog posts, etc. So please head over to wealthwithin.com when you'll be able to find all these.
7:36 Speaker 01 But "Don't touch your money" is one I agree with, is that it really does allow you to compound and helps with your wealth generation. Again, it's not pulling money that you've made from the market out and spending it on a holiday. That's what I'm saying. Don't do that, because it'll severely restrict your ability to compound, but also to build wealth as well. Now, the thing is that the financial world simply assumes we already know what compounding is and that we should only believe them. What they tell us. Yeah, right. I don't think I've ever believed the financial services industry, even though I've been working in it for the best part of my life. I started working in the banking
8:14 Speaker 01 system in my early or late teens and early twenties. And to me, I've never believed what they've said because I worked in there and the whole idea is the Australian banking or financial services system is very good at taking your money and giving you a little bit of a pittance and telling you how good it was. And to me, that's not how things work. You know, I've often, if you've been listening to these podcasts long enough, you'd be understanding that I've called bankers rapists in suits. And I really do think that often happens that they tend to, they make money whether you do or not. And that's the thing is, so my goal is always to
8:54 Speaker 01 get you to ask why, ask what, ask how, but don't just take what they're talking about it. Don't take what your financial advisors are talking about. Don't take what the industry is talking about as gospel. Don't check it out for yourself and ask the questions. And then when you ask that question, you get an answer, then ask the question of the question or answer, ask the question of the answer, sorry. And really distill it down into what you can use and what's good for you because what's what's good for the big end of town is quite often not what's good for you as an individual investor. But as you know, if you've read my book, How to Beat the Managed Funds by 20%, I'm not one just to believe in what the big end of town spells. And not only do I question
9:35 Speaker 01 everything, I put research into either proving or disproving something. And this is exactly the same process I I'm talking about today when I'm talking about compounding. And I'm suggesting you go and do that same process. Don't just assume that what you've been told is correct. And I say this in our courses, in my books, etc. I said, don't just believe me. Question what I'm talking about. Pull it apart. If it works, it works and you make more money. If it doesn't work, don't use it. It's pretty simple. But know for yourself, you know, and I'm like, I'm always questioning the accepted norm. The reality is that most people use the word compounding without understanding how real wealth is actually created. So I'm going to demystify that today for you. Now,
10:18 Speaker 01 To me, compounding is one of those industry's most favourite words. Buy and hold and compounding are the two ones that they love. Dollar cost averaging has to be number three, isn't it? But let's be honest, the investment industry really does love that word, compounding. ETF providers love it, the fund managers love it, the financial advisers, they love it. Social media, finfluents, love it. Why? Because it sounds almost something magical. Now, mentioning compounding and suddenly people imagine wealth building itself, money making money, money making money while you are sleeping. And, you know, compounding is the eighth wonder of the world. And I totally agree with that when Einstein said that. It is the eighth wonder of the world. But really, what is compounding and how do you do compounding?
11:01 Speaker 01 But the more I hear the word used, the more I think we're drifting away from what it actually means. Let me really be clear, compounding really is real. It is also one of the most powerful concepts in finance and wealth building or wealth generation. These are facts that are beyond, totally beyond questioning. Now, what I'm questioning is not the compounding itself. What I'm questioning is how the word is used, the messages we're being sold. And I'm doing this because today, the word, the word compounding is often applied to almost anything that rises in value over a period of time, which is absolute rubbish. Now, imagine a property worth half a million dollars 10 years later. You know, you've bought a property, you put $500,000 into it and 10 years later, it's worth $1 million.
11:46 Speaker 01 As compounding occurred, ask yourself that. Now, most people would immediately say, yes, and argue that it's not occurred. Rather, the property simply, or that property that you bought for half a million dollars simply just increased in value. The property market decided it was worth more or more. People wanted to, that type of property in that area at that particular time in the economy. That's growth or capital appreciation. Now, let's look at a share. A company earns more money and so profits increase. Investors see this and so become more optimistic about the company's future. Given that investors are more confident, the share price rises because more people want to buy that share to get that future profit.
12:29 Speaker 01 Again, has compounding occurred? Or has the company or the value of the company simply become more valuable? Now, I would argue the asset has appreciated as the business has grown, the market being the investors has repriced that asset, that stock, based on what they believe it's worth today and what it will be worth into the future. Because we buy that future value when we're buying stocks. When buying a property, most of the time, we're buying a house to live in, so we're buying today's value. But when we're buying stocks, we're buying it with the idea and the hope or the belief that it will be worth more into the future. Now, these are all valid explanations, but none of them automatically means compounding has occurred.
13:14 Speaker 01 And when I think of compounding, as I explained earlier, it is generating new gains from gains received, not simply an asset becoming more valuable. And that's a very important distinction we all need to make today. Because growth and compounding are not interchangeable terms. And I'll say that one again, growth and compounding are not interchangeable terms. Yet the industry often treats them as though they are, and worse, they make investors believe it too, as it helps them keep investors fully invested all of the time. How often have you seen that? Stay invested, stay invested. And I've literally had people talking to me after the GFC, all sorts of different periods where the market fell away.
13:59 Speaker 01 And they said, oh, and my advisors kept saying, just stay invested, stay invested, stay invested. And just walk around the street and anybody today, and they always say, no, you can't lose if you just keep holding. And you can. There's a couple of things where you can lose. And one is you can lose physical capital, because if you bought something and it falls away and it stays there, then you've lost physical capital. But people don't want to sell it because then they realise that loss. But in anybody's balance sheet, if you have an asset that's worth less than you paid for it, you've lost money. It is pretty simple about that. But to me, you can't make money. And what's the opportunity cost and the time cost of you holding things that aren't valuable to you anymore, or they've dropped in value? So there's a whole range of things that we could talk around that.
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15:08 Speaker 01 Getting back to compounding, compounding occurs when gains are received and then redeployed to generate further gains. Now, in other words, getting gains on your gains, that's pretty much what it is. That's the key. Redeployment of gains received. That's, well, let's start with say $100,000 and though, and through active investing in the stock market, you can generate a gain of 20% or $20,000. Now, your capital now becomes $120,000. Then you repeat the process and deploy the whole $120,000 into another opportunity. This new investment generates a further gain and your capital grows. The gain initially received has become productive capital and that productive capital that
15:53 Speaker 01 you got, that $20,000, has also generated further gains. This, in my opinion, is genuine compounding and not the pseudo-compounding that the industry has promoted. Compounding is not simply an asset rising in value, but it is because gains were converted into productive capital and then redeployed so that you get further gains. That's a very different process than simply buying and holding an investment. And it's also different to adding new capital to your investment. This is, it's also different to other things such as dollar cost averaging or DCA. I see many people type into YouTube comments and all sorts of stuff.
16:34 Speaker 01 And, you know, yes, in our website, we have podcasts and articles on why you shouldn't, or why DCA or dollar cost averaging isn't necessarily the best way to invest and grow your wealth. So please head over there. But here's the question I rarely hear discussed. Why is compounding always presented through the lens of average returns? Most examples from ETF providers look at something like this. They invest $100,000, earn an average market return, leave it invested for 20 or 30 years, then marvel at the final number. And we're told this is the power of compounding. And they expect us to be very happy with that. Maybe, but I think by now you might be questioning this logic.
17:17 Speaker 01 Perhaps not because the most important lesson I can share today. Perhaps the more important question is what return is being compounded? Because compounding doesn't create the return.
17:30 Speaker 01 The return already has to exist. Compounding simply magnifies the return. I want you to think about this really, really carefully as it is really important for you. As investors, we cannot control the return in a market. We can only control when we're in the market or a stock and out of the market and stock. What we can control is choosing to compound the return we get or not compound it. Let me explain this with a simple example. Imagine two investors both start with $100,000 to invest. Investor A follows the traditional passive investing model in that they invest an amount of money and then do nothing, just bone hold leave it. While investor B decides to become an educated investor.
18:15 Speaker 01 They've read my book and now understand how to be more active in the stock market. Investor A buys an index tracking ETF with the aim that the ETF tracks the return of the overall stock market. Basically, it's designed to track the value of the S and P 500. Now, 25 years later, the S and P 500 has grown significantly. Now, the industry continually tells investors, say, hey, that's the power of compounding. That is it really? And if you bought a house for $100,000 and then 30 years later it was valued at $300,000, would you say that was compounding or would you just say you've made a gain of $200,000? Or let's say you bought a Picasso painting for $100,000 and a few years later it was worth $300,000.
18:59 Speaker 01 Is that compounding or just capital, just simply?
19:04 Speaker 01 You've just made a capital gain. You know, I'm not, I'm sure you can actually see where I'm going with this. The growth in the asset value is just that growth and it's not compounding. Because that asset can also go the other way. If people don't like Picassos or let's say a big dirty factory, you know, plonks itself in the next street to you, the value of your house will go down. So how are you compounding? So because it's just the asset value now, because the issue I see so often is that investors become complacent and are happy. As long as the investment is growing, they rarely look at the real cost to them. And this is something I like to talk about a lot, you know, because to me, this is the difference. The compounding can make to your end result in your wealth creation.
19:46 Speaker 01 Now let's get back to investor B. Now investor B puts some time in and studies the stock market before investing. Now they learn about risk, money management, when to buy and when to sell amongst other things. Now they spend a little time testing and they develop their skill because they understand or they now understand risk. And the timing of entry and exit into stocks in the market over 15 years. Now investor B buys and sells stocks and reinvests the extra capital earned to build their portfolio to over $1 million. Now here investor B is gaining a higher return through being active. And then compounding that higher return to achieve far more than investor A. So here's the important question, what created the difference?
20:32 Speaker 01 Many investors prefer to buy and hold ETFs and direct stocks rather than compound. They do this, then they're just allowing their capital to grow over time as the ETF or stocks grow in value. This is simply achieving capital gains. Investor B is different, Poach. And investor B is aimed to achieve superior returns through being active investor or being an active investor. And essentially investor B was in the stock market when it, all the stocks they were holding were rising and out of the market or stocks when they weren't. If they were profitable, those gains were then reinvested. And those gains were exposed to achieving a return themselves. In essence, they were making gains from their gains, as I mentioned earlier. But here we need to discuss the returns, and this is an important point.
21:17 Speaker 01 Returns are not consistent and history tells us that the Australian stock market over the past 120 plus years has risen four out of every five years on average. Now, the most common increase in any one year, the average of that sits somewhere between 10 and 20 percent. That's the most common return that we see. Now, it's only wise to not be in the market when it's selling, especially in those years when it is crashing. And whilst it rises four out of every five years, that's the average, as I mentioned. The market can fall for several years before it finds support and then rises again. Now, again, it's wise not to be in the stock market during the times when it's falling, as this will allay to compound more and generate better returns for yourself.
22:01 Speaker 01 The real situation is that someone who buys and holds their investment will ride the roller coaster of returns from positive to negative. This is what occurs for the vast majority of investors and what the industry wants investors to do. Now, you might be asking, why would the industry want it if the returns are not as good? Surely, the industry are trying to get the best return for you they possibly can. Well, quite simply, they can collect fees and not have to do much to get them. And I know that's probably an oversimplified way of saying it, but in general, the financial services industry, they want to give you the least amount of time, you get the most amount of money for them in fees that they can charge at any one time, but give you a return that you
22:44 Speaker 01 accept. You may not be fully happy with it, but you'll accept it. And they tell you stories like, well, you need to be, you know, if the market's going down, so you've got to accept a low return. But do you have to accept a low return? The answer is no, you don't have to accept it. You just have to ask why. As I was saying before, you know, check things. Decide for yourself, do you need to be in the market or not in the market? Because someone who's an active investor is actively seeking to avoid negative returns and has a goal of maintaining good returns. You could have that too. This is why active investors need to be educated investors. Otherwise, their results will be hit and miss. And we see people like that all the time coming to us. They've been hit and miss for many, many years because they believed a lot of these myths. Now, the difference
23:29 Speaker 01 in these examples wasn't the mathematics around compounding. The difference was that investor A was not compounding returns, but rather they were just, they didn't investment grow in value. Now, investor B was compounding as they were actively investing through the buying and selling of stocks. And as a result, they were getting higher overall returns in selling to realize a return that enabled them to compound those returns as the profits were being reinvested. Thus gaining growth on those realised gains in subsequent years. As you're now starting to realise growth can create wealth as compounding magnifies your wealth creation. Now, the essential thing to remember is that pretty much anybody can compound.
24:10 Speaker 01 Now, the challenge that we've had with a lot of people is they look at things today, but they don't look at the real cost of not doing this. And that's sort of what those examples we're talking about, would you rather have at retirement in thirty, or let's say in thirty years, would you rather, you know, have a start off with a hundred thousand today and have three hundred thousand in thirty years or one million in thirty years? Because the real cost to you by not being an active investor and not understanding these principles is seven hundred thousand dollars. And it is really interesting to me when I see people write in posts, you know, whether it be on chat forums or our YouTube channel or we hear them on the phone going, oh, your course is expensive.
24:54 Speaker 01 And I'm thinking, well, ignorance is far more expensive, isn't it? Let's go back and we'll compare those two investors over thirty years, not to prove one approach is right, but to illustrate a point. Because investor A with a hundred thousand dollars, they buy the index ETF, they achieve eight percent per annum. After thirty years, their portfolio grows to approximately one million dollars. Now, fantastic result, most people would be thrilled to having a million dollars, but now let's look at investor B. Investor B invest in their education, learns how the market works, studied risk management and they probably do that, they could do that for twelve months or two years, okay, and not be investing. This is the critical point. Now, studies, they study risk management, they learn to protect their capital, they learn how to identify opportunities, nothing too hard here.
25:39 Speaker 01 Now, over time, they achieve a fifteen percent return, not every year. And they don't do it perfectly, but consistently over the long term, they're profitable. And over thirty years, their hundred thousand dollars grows to approximately six point six million.
25:54 Speaker 01 Now, here's the fascinating part. The difference isn't 7% between the 8% and the 15%, the 8% the ETF got and the 15% that the active investor got. That's not the point here. The difference is more than $5.5 million, which is what I was talking about before is that's a huge difference just by spending a bit of time understanding how markets and stocks work, understanding buying signals, how to understand money management, risk and a few other things that we do teach. That's the difference that enabled trader B or investor B to get a 15% return, but not just that, is to how to compound those returns.
26:35 Speaker 01 And it was worth millions of extra dollars over the same period of time. Now whilst these are sort of arbitrary figures, these are things that are actually happening to people who are active and do understand what they're doing with the stock market. But think about that. Seven percentage points sounds insignificant, doesn't it? 7% doesn't sound like much. Yet over time, it became life-changing for investor B. This is why I keep saying the returns matter, because compounding didn't create the difference. The return created the difference. Compounding simply amplified that return. It amplified that 15% return. That's a very different conversation from the one most investors are having, who just buy and hold and let whatever the fund manager or the financial services industry give them.
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27:43 Speaker 01 Let's get back to compounding, because whenever compounding is discussed, we, the Warren Buffett story enters that conversation or people talk about Buffett. And we're told Buffett became wealthy because of compounding. Well, I tend to disagree somewhat with that, or at least partly anyway. Now Buffett didn't become wealthy because he understood compounding. You know, he understands compounding just like I do. Millions of people understand compounding, not just Buffett and I. Most aren't billionaires though who understand compounding.
28:14 Speaker 01 Now Buffett became wealthy because he consistently generated returns over an extraordinarily long period of time. He bought exceptional businesses or unloved businesses that were exceptional, who are undervalued, you know, but what do you say, one of the things he said, you know,
28:34 Speaker 01 buy it for the future, buy something that you'd hold for 50 years and buy something that's going to be growth over that period of time. Basically, you can say he allocated his capital intelligently and he avoided major mistakes. He exercised patience, but Buffett did make mistakes. He did buy some stocks that didn't do very, very well. Nobody buys every stock perfectly, but he exercised patience, compounding magnified the outcomes that he got, but it didn't create the outcome. If Buffett had achieved average market returns, pretty much nobody would know who Warren Buffett is. Now, the thing that made Buffett extraordinary wasn't the compounding, it was the performance he was able to achieve from the stocks that he was buying, buying the right stocks at the right
29:19 Speaker 01 time and using them that way. And contrary to popular opinion, Buffett is not necessarily a full on buy and hold person either. He does sell stocks as well. But this is where the, really the conversation becomes a little bit, can I say uncomfortable, because investors are constantly encouraged to accept average returns. And think about that language. Match the market, stay diversified, don't try to outperform, time the market, but timing the market, time in the market beats timing the market, if I can say that correctly. And there's a wisdom, as I said earlier, in some of those sorts of ideas, but they don't all point to the same direction, except average. Seriously? Now, let's be clear, average is better than doing nothing. I'm not going to say that. And average is better than leaving
30:02 Speaker 01 money in a bank account, but should average be your goal? And every person I talk to, there's no, they don't want to be average. They want to get above average returns. They want to beat the stock market. They want to beat what the ETFs are giving them, but to do that. You have to give something up to get something. And I'll say that again, you have to give something to get something. And so to be beating the average or to get better than the average, you've got to give up something, whether that's time or money or something else to learn how to do that. And again, that's where I was saying earlier is what is ignorance costing you if you don't know how to do this? Because it's very simple, just buy my book or do some of our courses.
30:44 Speaker 01 And whatever level you want to be at or are at now, and whatever, to me, you can, people look at the horizon and go, well, that's a long way away. But then when you sail towards it, the horizon gets further out. So you can take your journey as far as you want to take it. Some people just stay with my book. Others will do my beginner's course, others will go right through and complete our courses. So but the more, right now, you don't know what you don't know. And to me, as you learn more, then you can appreciate more and then you can understand, well, maybe I can do better than this, maybe I can achieve more again. And that's the thing, but if as, you know, if you don't start, you just don't start. And you never get there and it's basically doing nothing, basically gets you nothing. But now let's ask an uncomfortable question.
31:29 Speaker 01 Why is compounding such a popular topic with the financial industry? Now, I don't believe it's because the industry trying to mislead people. Most professionals really generally do want to help people. But there's another reality. Compounding is easy to sell. It requires no effort, no education, no skill development, no accountability. And the message is really, really simple from the industry, buy, hold, wait, die, basically. And while that message may suit many investors, it also creates a passive mindset. And a mindset that says average is enough.
32:02 Speaker 01 Well, do you have a, do you have a mindset that average is enough? That's the question you need to ask yourself. Now, I think about that from the perspective of an ETF provider. Their goal is not to help you outperform the market. They just want to average the market. And they don't do that really well either. You might check out my podcasts on that. Now, the goal is to simply help you track the market. That's exactly what the product is designed to do. And again, there's nothing wrong with that if you understand what it is. But investors should understand the objective. The objective is average market performance, not superior performance, not outperformance, average performance. Now, the challenge is that many investors never stop to ask where's the average is actually what they want.
32:45 Speaker 01 And I'm proposing that now. Do you want average or do you want above average? Now, this may be the most important distinction in my podcast today for you. Most people think that, you know, they're the same thing. They're not. Wealth accumulation is what most Australians do. They save money, they contribute to their super pay down their debt. If they're lucky before they retire, they buy a home if they're lucky nowadays. But they invest in managed funds or ETFs and over time they accumulate some wealth. And there's nothing wrong with that. You can get wealth. But is that where you want to be? The amount of wealth that you get, is that where you want to be? And the sad fact is statistics from the RBS, et cetera, telling us that people, most people are still retiring on some form of government pension.
33:29 Speaker 01 More than half of the people are retiring on full government pension. So that wealth generation and accumulation of wealth, the way we've been doing it, just is not working. And it hasn't been working for decades and decades. But there's nothing wrong with that, as people, the financial services industry say. And in fact, it's part, you know, if you're doing something, it's far better than doing nothing, as I said earlier. But wealth creation is different. Wealth creation focuses on generating superior outcomes, or your wealth creation should focus on creating superior outcomes for yourself. If you're in business, you're trying to do this all the time. Successful investors do this. Successful traders do this. They don't simply just
34:08 Speaker 01 accumulate money and assets. They create them. They seek opportunities. They develop their skills. They take calculated risks. They try and improve performance at all time. And again, it's not time consuming. It's not rocket science. Anybody can do this with a little bit of effort. But again, if you do nothing, nothing happens. Do something and you can get outperformance. And then you can compound that out performance and then you can achieve the wealth that you really deserve. And that's why some people achieve extraordinary outcomes while others achieve average outcomes. And based on retiring, people retiring over the last few decades, you know, you probably know people
34:50 Speaker 01 who've been retiring and they're struggling or they're not been able to do everything that they want. And I don't know about you, but I've never wanted to be average. So if you don't want to be average, you've got to do something different. But anyway, some people are happy with average. But, you know, both may benefit from compounding, but one is compounding wealth creation, the other is compounding wealth accumulation.
35:13 Speaker 01 Difference, they're very different things. That's why I believe, because it's the real cost of that compounding and that story. Remember, we're talking about, would you rather have $6 million or $1 million every time? This is why I believe the misuse of the word compounding matters because language shapes our behaviour. If investors are told compounding is the secret and then they focus on compounding. But if investors are told superior returns are the secret, then they'll focus on developing skill. There's a very different outcomes. Now, one creates passive participants, the other creates educated investors. Now, the greatest investors, business owners and wealth creators I've ever met simply don't just rely on compounding, they relied on education, skill, discipline, decision making.
35:57 Speaker 01 Now, compounding was the by-product of all of that and they allowed their returns to compound and build their wealth. Now, the next time somebody tells you about the power of compounding, just ask a different question. Not, "What can compounding do for me?" Ask, "What exactly is being compounded?" Because that's where the answer lies. What is average performance? Is it superior performance? Is it intelligent decision-making? Is it quality assets? Is it productive capital allocation? Because compounding doesn't care. Compounding will magnify whatever you feed it. Good decisions, bad decisions, average performance, exceptional performance. The mathematics in it, it's just mathematics in it. It's black and white. It's neutral, you know? It's Switzerland.
36:41 Speaker 01 But the investing industry really does love talking about compounding and rightly so because compounding, as Einstein said, is one of the most powerful concepts. You know, it's the eighth wonder of the world and one of the most powerful concepts in finance anyway. But I think we've allowed the word to become bigger than the process itself. We've confused growth with compounding. We've confused appreciation with compounding. We've started treating compounding as if... As though it's a strategy, but it really isn't. Compounding is just a mathematical outcome that if you get a return, you reinvest that and then you get a return on your return. Simple, making money, making money. Or, get my point, or mind you, making, you don't have to transfer time for money.
37:24 Speaker 01 Your money is doing, making more money for itself. Because the real drivers of wealth creation are, number one is getting an education. And then developing skill is number two. Discipline is number three. Sticking to what you know and what you can do. And then getting quality assets and intelligent capital allocation. Superior decision making. Yeah, compounding simply maga, magnifies, magnifies the results of, you know, having those skills and, and knowledge and getting the returns that you can generate and anybody can generate simply and easily. So perhaps the question really isn't about whether you're compounding. Perhaps the real question is, what are you compounding? Because if you spend a lifetime compounding average returns, you'll likely achieve average outcomes. But you spend a lifetime developing skills and generating superior returns.
38:09 Speaker 01 Compounding becomes even more powerful for you. And that's a powerful wealth building tool for you. That's freely available to you once you understand it. Because the industry wants you to focus on compounding. But I want you to focus on what you're actually compounding or the return you're compounding. Because the better you can get your return, the more money you'll have, the more money you have, the better you are. And yeah, look, you know, more recently with the federal budget, a lot of people have been scared off investing a little bit. And I think we need to flip the script here. Because this is when you need to do more. Because it's, the governments change and taxes change. And, you know, depending on who's in government next, they may reverse some of the decisions on the taxes. It just goes round and round and round. And there are things you can do to minimize tax, all sorts of things.
38:54 Speaker 01 But the one thing I know is the more tax you pay, the more money you're making. And to me, that's better. As long as you're making more money, so it's not time to give up. But before we finish today's episode, I really did want to leave you with one final question. You know, for the last decade, you know, have you been focused on compounding? Or improving this thing being compounded. Because that's where the real opportunity lies. Very few people talk about improving returns. They just accept average, as we discussed. Improving your decision making, improving your skill, improving your capital allocation, money management, all those sorts of things. They're all things that'll ultimately determine the outcomes for you and how much that outcome is.
39:38 Speaker 01 Compounding just amplifies that return that you're able to get. So if you can make 10%, or you're making an average 7% or 10% now. If you could make 10 to 15%, or 15 to 20%, how is that going to amplify your wealth creation? That's really what I'm talking about here. And what's the cost to you over a period of 10, 20, 30 years? By not being able to do that, or not knowing how to do that, or not putting that effort in to be able to do that. And we're talking hundreds of thousands of dollars at least. And you can all understand that based on what we've talked about today. So again, is how much is understanding worth to you? It's not, again, I said earlier, we have to give up something to get something. And sometimes that's time, sometimes that money,
40:22 Speaker 01 sometimes it's time and money to get what we want. But I used to call it, when I was younger, I used to talk about delayed gratification all the time. And you would have, if you've been listening to these podcasts long enough, you would have heard me say a few times, you know, I will do today what others won't, so I can play tomorrow where others can't. Which means, you know, it might take six to 12 months or two years to learn something, when everybody else is doing other things. But then I'll catch up because I'm better, more knowledgeable, more experienced, more skillful. And then I'll compound and grow from there. So again, sometimes you have to take the time to do it. Sometimes you have to put the investment into yourself, which might be a financial investment, not just a time investment as well.
41:06 Speaker 01 But the outcomes are there if you choose, you want to do that. Because, as I said, compounding is amplified. You're the signal, and the quality of the signal determines everything that follows. And I was only chatting to somebody the other day about, you know, asking them why they thought Wealth Within was called Wealth Within. And it was interesting, their response, but most people don't get it. I'm going to ask you to think about it. Why are we called Wealth Within?
41:35 Speaker 01 What I'd also like you to do is talk to somebody else. If you know other people that are trying to navigate this world, this financial world, introduce them to our podcast. Again, you've been listening to Talking Wealth and I'm Dale Gillan, the Chief Analyst here at Wealth Within. I hope you really enjoyed my podcast on the biggest myths about compounding, as I said, because it's the most misunderstood word, I believe, in investing. But anyway, you take care.
42:05 Speaker 00 This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice.
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