Glossarytaught in M3.01, M0.03
Compounding
Also called compound growth, compound interest.
Earning a return on returns already earned. It is the reason long-horizon outcomes are so unintuitive.
₹1,00,000 growing at 15% for twenty years becomes ₹16,36,654. At 12% over the same period it becomes ₹9,64,629. So three percentage points of annual return gave you 70% more terminal wealth. That's a big gap from a small-looking difference.
The asymmetry runs the other way too. Lose 50% and you need a 100% gain just to get back to where you were. So if your process has to survive several decades, avoiding permanent capital loss matters more than chasing returns.
Interruptions cost more than the arithmetic suggests.
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