You've heard it a million times. 

Einstein talked about it, Warren Buffet lives by it and you probably even talk about it yourself. 

Einstein called it the 8th Wonder of the World.

It's the power of compounding

   "He who understands it, earns it. He who doesn't, pays it.”

Everyone thinks they know what it is, but it's not nearly as intuitive as it seems. 

Mostly because in the beginning it's really slow to see the results from it. 

The true advantage of compounding comes the longer you let it compound. 

But it's also just as important, if not more, to be in the right investment - table selection. 

S&P 500

Let's look at a $10,000 investment in the S&P500 ($SPY - fee's not included) which has a Compounded Annual Growth Rate (CAGR) of about 13% (not inflation adjusted).

After ten years that investment would have returned 264% and compounded to $36,437.

NASDAQ

Now let's look at a $10,000 investment in the NASDAQ ($QQQ - fee's not included) which has a Compounded Annual Growth Rate (CAGR) of about 19% (not inflation adjusted).

After ten years that investment would have returned 558% and compounded to $65,871.

That's only 6% difference in CAGR, but the returns are 2x greater. 

Let's look out 20 years

- SPY 20 years = 1,227% and $132,767

- QQQ 20 years = 4,239% and $433,900

The distance between the two gets even greater the longer you let it compound, at a mere 6% difference.

This is why I decided to launch my hedge fund. 

The Version 1.0 of the system has a 58% CAGR.

The system in Version 1.0, as it currently stands, tested on 1,000's of years of out of sample data, futures, equities, commodities etc.. performs similarly in each asset class (not crypto) more than doubling the performance of the $QQQ CAGR.

It's just that it performs a lot better in crypto. 

And since we are talking about it, let's see what 10 and 20 year returns would be for a $10,000 investment (excluding fee's).

10 Years = 28,735% and $2,883,549

20 Years = 8,324,757% and $831,485,757

That's the same $10,000 investment but completely different returns. 

Do I expect that to come down? Yes I expect that to happen, and if it does I expect it to perform as good as the other asset classes.

And if the CAGR doesn't come down, well that'll be just peachy!

One thing I didn't talk about was the size of the drawdown here. Getting in to something that is putting up such good returns should be pretty volatile, right?

The Version 1.0 of the system has a Max Drawdown of 20%, while the crypto sector in general put in multiple - 50% drawdowns, S&P and NASDAQ went through some -30%'ish drawdowns as well. 

So the system is compounding at nearly 2x it's max drawdown, while traditional markets are doing the opposite, drawing down more than double the compounded returns.

That is to say, while it seems to most people that the S&P or NASDAQ is the safer investment, and in a buy and hold environment that is the case. 

But using a couple of foundational tools, the same tools that we always talk about here, it changes everything.

These foundational tools, get ready to be blown away!

Position Sizing and Regime Matching!!!

Yawn

Did you think I was going to say AI? lol!

The most important here is position sizing (in the quant world we call that Volatility Targeting).

When things are most volatile, we are light on positions, and when volatility is low we are heavy on positions. 

And then trading the correct system and correct asset for the environment you are in...aka trend following when there's a trend. 

That's table selection. Or market regime matching.

In a world where inflation is chomping away (with big bites) in to your buying power think about how far behind you could be by making the wrong choice.