Compounding effects

A primary motif of this year’s Berkshire Hathaway letter is the compounding effect of reinvested earnings…

… which on a relative basis will have a similar impact to that of “riding winners” in an actively managed portfolio…

… and influences the selection criteria of new investments, such that they all share this same potential going in.

Like other compounding scenarios, the case implies a repetitive and constant turning of the wheel, even if at varying velocities, that would add layer upon layer of incremental value with the passage of time…

… and which in a related context resembles the compounding value impact of network effects and the addition of new network layers to growing network bases.

Similar to earnings growth and reinvestment, the network needs to be attended to and nurtured…

… but the result is likely to be outsized when well planned and managed with discipline, with a view towards the long term.

A potential illustration from the recent newswire:

WSJ – Intuit Near Deal to Buy Credit Karma