Compounding Snowballs

  Over the next four posts, I am going to post short stories and explanations on important stock metrics. I am going to cover dividends, debt, P/E ratio and more. These stories are meant to be easy enough for a child to understand. Throughout the stories, there will be four characters, Farhang(Father), Kristin(Mother), and their daughters Lily and Sara. Lily and Sara open up their own lemonade stand but they have some troubles, sometimes it rains so they don’t get enough customers and other times their father, Farhang, just can’t wrap his head around the concepts. Profit Margins: We are going to start with Profit Margins. This story will take you step by step on how to calculate the Profit Margins of any company you have interest in. Sources such as Morningstar and Motley Fool help you find the exact calculations without doing the research but you should at least know how to find the data you need and how to calculate it. As an investor it’s important to know wh...

A well known Warren Buffett quote is about a snowball. "Life is like a snowball. The important thing is finding wet snow and a really long hill." He is saying that to compound, or to increase the size of your "snowball" you need two very important things. One is wet snow, otherwise known as a stock that has a good rate of return and a yield that will with time increase the value of your snowball. That leads me into the second item, a really long hill. What Mr. Buffett is referring to is time, you need time to really see your stock grow. In this post I will be talking about how to know how long it will take your snowball to double in size and the difference between reinvesting your dividends and spending the money. A simple estimate to figuring out how long it will take for the money you invested in a stock to double is The Rule of 72. Unlike other investing rules you can easily find the amount of time it will take to double in value just by having the...