The Rare Privilege of Compounding

Around the same time, I came across a story that offered a similar millennia-spanning perspective from an investor’s point of view. In a recent Wall Street Journal piece, Jason Zweig shared an anecdote about the late bond investor Martin Leibowitz. During a job interview in 1969, Leibowitz was asked to imagine a Roman soldier in 33 A.D. investing the equivalent of 10 cents at a 4% annual return. Over nearly two millennia, the small starting amount would have compounded to be larger than all the wealth in the world.¹ But according to Leibowitz, before he could finish the calculation, he was asked a second, more intriguing question: what happened to that wealth?

Compounding’s Historical Fragility

It’s a deceptively simple question. There are no descendants of Roman soldiers with bank accounts containing more zeros than anyone could reasonably count. The answer, as Zweig points out, is that no fortune compounds uninterrupted for 2000 years. Somewhere along the way, wars are fought, plagues arrive, businesses fail, assets are confiscated, or investors simply make poor decisions. The wealth disappears long before compounding can perform its miracle.   

But viewed through the lens of history, the real miracle isn’t compounding. After all, that’s just math. The real miracle is the rare privilege of living in a society where capital has a reasonable chance to survive, grow, and compound over long periods of time.

There is a paradox here. Despite repeated episodes of wealth destruction, humans have become far more prosperous over time. Life expectancy has increased, standards of living have improved, and innovations once considered miraculous have become ho-hum parts of everyday life. How can wealth be so fragile, yet improvements in prosperity be so durable?

The Durability of Human Progress

You can find one explanation in the writings of Matt Ridley, who some Nexus clients might remember was our guest speaker at our 2021 annual event. In The Rational Optimist and later How Innovation Works, he argued that prosperity grows not because fortunes survive, but because human ideas do. Over time, humans learn from each other, we specialize in specific areas, we trade, we run science experiments and, critically, we build on the discoveries of previous generations. The result is a gradual accumulation of knowledge that makes societies more productive and prosperous.

Innovation, according to Ridley, is not the product of solitary genius but rather the result of human collaboration. Steve Jobs didn’t wake up one morning and start building an iPhone. He assembled pieces of technology that thousands of people had spent decades developing and combined them in an innovative new way. Bob Dylan talks about song writing in the same way – he studied other musicians, absorbed their ideas, and recombined them into something new.

From an investor’s perspective, Ridley’s ideas are useful to mull over. The Roman soldier’s 10 cents may not have survived for 2000 years, but human society did and we didn’t spend our time twiddling our thumbs. Trade expanded, productivity increased, lifespans extended, and new technologies proliferated all around the globe. To be sure, individual fortunes rarely endured, but humanity’s capacity to innovate continued to advance.

Investors participate in that process by owning businesses that harness innovation, solve problems, and contribute to a steadily growing pool of human knowledge.

The Rewards of Participation

As investors, we’ve benefited from the fact that Ridley’s ideas are not merely theoretical. In the landmark study Triumph of the Optimists, the authors analyzed 101 years of investment returns across 16 major countries and multiple asset classes. Their conclusion was that not every investor, business, or even country did well (in fact, many failed entirely). Rather the conclusion is that long-term owners of diversified collections of productive assets were rewarded for their participation in a system that, despite various crises along the way, generated a remarkable amount of innovation and economic growth. The optimists triumphed, not because the journey was a walk in the park, but because human progress continued through thick and thin.

Passing It Forward

Thinking back to that conversation with my son, I think the history he’s studying serves as a useful reminder that the foundations of long-term compounding were hard won. If you’re fortunate to have any young people in your life, let them know that they have a wonderful opportunity to participate in this system and have compounding work in their favour. Here’s one blueprint to get them started on the path. If you’ve benefitted from compounding in your lifetime, it’s worth considering how to pass those benefits on to children, grandchildren, and future generations. My colleague Alex Jemetz explored that topic in a blog on the importance of wealth transfer planning.

The Power of Compounding Endures

Unlike the Roman soldier, all of us have the benefit of being able to look back at the long arc of 2000 years of history. Through that lens, many of today’s market concerns appear remarkably fleeting. Elections, recessions, tariff disputes, interest-rate cycles, and market corrections dominate headlines for a while, but are eventually replaced by a new set of concerns. Yet over longer stretches of time, the forces that have mattered most to investors have been far more durable: innovation, productivity, human ingenuity, and our ability to cooperate, exchange ideas, and create value.

However, keeping that long-term perspective can be surprisingly difficult to maintain. Financial news, market forecasts, and economic predictions create the impression that success depends on knowing what happens next. But the truly extraordinary opportunity is not predicting the next six months, it’s having the ability to remain invested through the next several decades.

The rare privilege of compounding is not merely a mathematical phenomenon. It is the product of centuries of accumulated knowledge, functioning institutions, property rights, scientific progress, and relative stability. For long-term investors, the challenge is not to predict every twist and turn along the way. It is to recognize the foundations that make long-term compounding possible, participate in them thoughtfully, and avoid becoming our own worst enemy by interrupting a process that has rewarded patient owners of productive assets for generations.