Compounding Value vs. Compounding Quantity?

As investors, we have two basic goals we can pursue.

1. Increase the market value of our investments.
2. Increase the quantity of our investments.

From my early days of investing until the market crash of 2008, my focus was entirely on increasing the market value of my investments. I had a specific net worth goal and every action I took was to move towards this net worth goal. When the market crashed, the paper value of my investments disappeared. I had zero control over this loss. Even worse, since many of my investments were leveraged with mortgages, the paper loss became a significant real loss when assets were sold at bottom barrel prices.

Since the market crash, I’ve slowly shifted to focusing on the quantity of investments. By quantity of investments, I’m suggesting income producing assets. These income producing assets include single-family homes, mobile homes, shares of blue chip dividend paying stock, and low-cost index funds. None of these investments are acquired with leverage. Because my goal has shifted and I’m not using debt, I have no concern whatsoever on the value of these investments. The focus is simply to try and accumulate more income producing assets each month.

We have very limited control over the market value of our investments. We do; however, have significant control over the quantity of our assets… assuming we avoid leverage… and can buy and sell whenever we want.

By focusing on quantity vs. value, we can create an environment where changes in the market have little impact on us. The reason why is because a market value loss isn’t a loss and this is because the loss doesn’t impact the quantity of our assets. In fact, a market value decrease provides the opportunity for additional asset accumulation at lower prices.

We’ve all heard the saying, “What you measure improves” and this is certainly true when we have control over what we’re trying to measure. Measuring the market value of our investments does nothing to help us in the long-run when we have zero control. In fact, measuring market value may give us a false sense of security when the market value disappears. It certainly did for me.

Shifting our focus to measuring quantity gives us an incredible opportunity over the long-run and this is because we have 100% control. Consider these three goals:

1. In 40 years, I want to have a million dollar net worth.
2. In 40 years, I want to own 10 mortgage-free single-family homes.
3. In 40 years, I want to own 25,000 shares of high quality blue chip stock.

Which goals do we have control over? Which goals are dependent on market conditions?

I’m a fanatic about compounding. The problem with most compounding calculations is that we have to make various estimates on market value, or average annual returns, over time. If you invest $300 a month and earn an average of 8.5% for 40 years, you’ll have a net worth of $1,112,855.75. This net worth is 100% dependent on earning an average of 8.5% over 40 years. What control do you have over this? None.

Let’s set the goal based upon quantity instead…

If you acquire 53 shares of blue chip stock each month for 40 years, you’ll own 25,000 shares of stock.

Does the market value of the stock impact our goal at any point in time? No.
Do we have to make any assumptions to achieve our goal? No.
Do we have complete control over this goal? Yes.
Will the next market crash impact our plan? Yes, it will make it easier to accumulate more shares.
How much will our 25,000 shares of stock be worth in 40 years? Not sure.
How much income will we collect on our 25,000 shares of stock? Not sure.

Ponder this shift in focus and see if you think it’s a better approach to investing. Imagine being in this position:

Did the stock market drop by 10% today? Don’t care.
Did the real estate market drop by 10% today? Don’t care.

Did I acquire new income producing assets this month? (This is a more important question and one we should care a great deal about.)

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