Nobody has been able to nail down whether Albert Einstein in fact described compound interest as one of the great (or even greatest) forces in the universe.
Certainly, compounding as a phenomenon is fundamentally embedded in the nature of the universe. And certainly, it can be quite powerful when applied to the financial world, as Jim Collins and Jerry Porras illustrated in their 2004 bestseller Built to Last: Successful Habits of Visionary Companies.
The authors - one a consultant, the other a professor - polled 700 CEOs of Fortune 500 and Inc 500 companies, asking them to nominate up to five companies they perceived to be highly visionary. The pair then selected the 18 that received the most mentions.
Looking back, they found that from 1926 to 1990, these 18 companies' shares averaged a return of 14.4 per cent a year, compared with 9.7 per cent for the general market. Impressive on a yearly basis, the difference in returns is stupendous when compounded.
Demonstrating what Einstein meant, that US$1 invested in these companies on January 1, 1926, would have been worth US$6,356 at the end of 1990, compared with US$415 for an equivalent investment in the general market. (The five of the 18 firms founded after 1926 were added into the equation as and when they became listed.)
So as a shareholder, how do you identify companies that can churn out these kinds of long-term returns?