Compounding

Continuing with the theme from yesterday of the overlap between Stock Exchange investing and Betting Exchange investing, the importance of compound interest is one of those lessons in life that I wish I had learned earlier. Or perhaps 'appreciated' is a better word. If I had diligently put away 10% of my income from day one, I would now be living on my own private Caribbean island. Decisions would be limited to such topics as where to sail my private yacht today, or which celebrity I should invite over for lunch. Sadly the 'if' didn't happen, and my life is rather more mundane as a result. Rather than being 40 when I achieve the goals described earlier, I will be more like 127. It's not looking good. (Make that 126 - the stock market had a good day today - FTSE 100 +1.98%).

The forums regularly have posters starting new challenges - 2% a day for a year and the like. 2% a day? 2% a day is massive. Actually, it's more than massive. 2% a day on a starting bank of £100 would make the bank over £137,740 by the end of the year. Is this realistic? I'll tell you - it's about as realistic as the idea of my living on a Caribbean island. In finance, 10% a year is considered an above average, very decent, return, (Bernie Madoff lured investors with returns of 11%-12%) and what is the daily increase needed to achieve this? I can tell you - 26/1000 of a percent (0.026115% to be precise).

The appearance is that while financial investors are quite happy putting their money to work in an investment vehicle that will return 8% a year, sports investors are not. Are sports investors particularly impatient, or is part of the psychology of gambling that immediate results must be achieved? Do betting exchange traders also have funds invested in the stock market? For any serious sports investor, the percentage of the bank at risk on any one bet should typically not be much more than 2%, so why the desperation at a losing day?

Financial investors do not expect stock prices to rise every day. A down day in the market is to be expected, but so long as the trend is upward no one really cares. Betting banks will likewise have down days, but if you are staking appropriately and have an edge, then in the long-run you will come out ahead. But not many people will achieve annual gains of 137,640%.