Accumulating your first big chunk of capital can often feel like an uphill battle according to many successful investors like Kevin O’Leary and Charlie Munger.
While they now sit on fortunes worth hundreds of millions or even billions, they claim their early days were filled with immense struggles.
This phenomenon highlights the sheer power of compound interest and how your starting base makes all the difference.
Kevin O’Leary, star of Shark Tank with an estimated net worth of $400 million, stated in a YouTube video that it’s “almost impossible” to make your first million dollars. However, once he reached that milestone, he found it much easier to scale up to $5 million.
Charlie Munger, vice chairman of Berkshire Hathaway sitting on $2.5 billion, echoed this view claiming the first $100,000 was by far the toughest to earn.
So why do these investment tycoons believe building wealth from scratch is so challenging compared to accelerating from an existing base? It all comes down to the magic of compounding interest.
The Powerful Force of Compounding Interest
Albert Einstein considered compound interest one of the most powerful forces in the universe given how exponentially wealth can grow over time. However, many overlook the significance of the starting base which has major implications on that growth.
To demonstrate, let’s consider two hypothetical investors – Liam and Amelia. They both identify an investment opportunity promising 8% annual returns over 20 years. The key difference is Liam has $100,000 ready to invest upfront whereas Amelia starts with nothing.
Liam immediately deploys his $100k capital and, thanks to compounding interest, it grows to $215,892 by year 10 without any effort on his part. After 20 years, Liam sells the investment for $466,095, a 466% total return.
Alternatively, Amelia first has to work hard and make sacrifices to build up savings. After 10 grueling years, she finally has $100k to invest. Over the next decade, she earns the same 8% annual returns as Liam and sells for $215,892 after 20 years. Her total return is 216%.
Despite having the same opportunity and time horizon, Amelia’s total gain was less than half of Liam’s. The reason is that she missed out on compounding gains during the first decade while accumulating her starting capital through pure savings. This highlights why building that initial nest egg is so critical yet challenging.
The Difficult Journey of Accumulating Startup Capital
Given the power of compounding, investors should make accumulating initial capital their number one priority. But this is far easier said than done. It requires immense discipline and sacrifice to scrape together meaningful savings when starting from zero.
O’Leary and Munger claim that in their early days, they had to pinch every penny, work tirelessly, and avoid unnecessary luxuries or leisure to build up their savings. There was no room for mistakes or lavish splurging that could set them back.
This difficult journey is analogous to Amelia in the earlier example. She had to work extra hours and buy cheaper clothes all while cutting back on travel and entertainment. Only after a decade of penny pinching was she able to invest in the opportunity.
Meanwhile, those who start with existing capital have a monumental head start. Not only do they avoid this grueling savings phase, but their money immediately begins accruing compounded returns. Just like Liam, existing capital allows investing with momentum rather than starting from a standstill.
The Toll of Sacrifice and Delayed Gratification
The sacrifice and discipline required in the early days of wealth building can be draining both financially and mentally. It often means delaying major life milestones and indulgences for many years.
Young professionals today face ever-rising costs of housing, healthcare, education, and childcare making it difficult to accumulate meaningful savings. For many, the delayed gratification takes an immense toll.
Surveys show that millennials today prioritize life experiences and indulgences over saving for the future. After a long day at work, it can be demoralizing to then have to cut back on small luxuries that provide a sense of joy and normalcy.
But the alternative is missing out on the immense power of compounding gains. As Munger put it, “The first $100,000 is a b*tch, but you gotta do it.” Those who withstand the hardship and delay gratification put themselves in prime position to let their money do the heavy lifting.
The Bottom Line
In the world of investing, the starting base makes all the difference. Due to compound interest, growth accelerates exponentially once meaningful capital is accumulated. But taking those first steps to build up savings requires immense sacrifice and discipline.
While the journey is difficult, establishing that initial nest egg unlocks the full potential of compounding. As O’Leary bluntly put it, “It’s almost impossible to make your first million.” But for those who withstand the hardship, they will reap the rewards for decades to come.