The Trick Is Having a Long Hill

Compounding Is Hard to See

Few understand the true power of compounding. It is a concept that is hard to grasp because you don’t observe it—it creeps up on you one day at a time. Two significant events this week remind us that the phenomenon is bigger than we think.

The first is Dow 49,000. If the market advances another 2%, we will witness the magical 50,000. This number by itself means nothing, but just a few decades ago, 50,000 seemed almost unattainable.

In 1980, the Dow was below 1,000, and it had struggled to gain ground for most of the 1970s. Without the benefit of dividends, it was a lost decade for stock investors. If someone promised in 1980 that the Dow would eventually hit 50,000, they would have been accused of smoking something (which you went to jail for in the 70s). If you assume dividends were reinvested, $1,000 invested in 1980 would have a total return of over $100,000 today. If the Dow can grow by just 7% per year for the next decade, an index of 100,000 becomes a given.

The second reminder comes from the news that Warren Buffett is retiring on December 31^st. The Wall Street Journal estimates that if you invested $10,000 in the 1960s in Berkshire Hathaway, you would now have over $600,000,000. This is the true power of compounding.

There were plenty of periods when it would have been easy to abandon the Berkshire ship. In the late 90s, Berkshire Hathaway lagged the S&P 500 substantially, and speculation was rampant that Buffett was old school in the age of the internet. Those predictions proved premature as returns once again gained speed. It is also well known that most of Warren Buffett’s net worth came after he turned 65—not because he was better, but because it took that long for compounding to kick in.

Patience Is Harder to Practice

The world today does not encourage patience. This year alone offers a window into the challenge of long-term thinking. We had plenty of reasons not to stay invested. Tariffs were a big one. They were expected to raise costs for both companies and consumers—and they weren’t going away anytime soon. Tariffs remain, but corporate America has adapted. Double-digit returns accrued to the patient this year despite political unrest.

The big picture always makes it look easy and begs the question: why don’t more people travel the compounding path? The path of the Dow was anything but smooth since the 1970s. We’ve lived through so many significant events in the past that we don’t even remember most of them. The Cold War. The savings and loan collapse. The recession of 2008 is now a distant memory. In the moment, the twists and turns feel overwhelming. In hindsight, we look back and say, “Of course, we overcame each challenge.” Ignoring all the twists and turns creates wealth; it just doesn’t happen while we’re watching.

We begin 2026 with the economy growing surprisingly strong. Who predicted that 12 months ago? The bigger question is whether you will ride the Dow to 100,000 in the next decade, or however long it takes.

Happy New Year.

P.S. – The Dow hit 40,000 not that long ago

Observations on the Market No. 414