Did you know Labor Day started as a Marxist movement?
20 years after the end of the Civil War, union members gathered in Union Square in New York for the very first Labor Day parade. It seems so funny that American Capitalists are basically celebrating communism today.
Anywho, why do I mention this?
Because there is one sector of the economy that doesn’t sleep today. One sector of the economy that will never be, and can never be, marxist in nature: the financial sector.
Sure, Wall Street is closed. Banks are closed. Insurance companies are closed.
But the time marches on. And that means the time value of money marches on…and the volume of interest it creates grows. See, when money marches, it turns itself into more money. It never takes a day off.
This is one of the simplest, and yet most profound, ideas in finance. No, it’s not as complex as understanding collateralized debt obligations. It’s not as sophisticated as target date funds.
In fact, it’s the weakest force in finance: interest.
It’s sort of like the weakest force in physics (gravity), and yet nothing, and I mean nthing, escapes it.
In the early years of a business, a loan, or any investment, interest is microscopic. You probably hardly notice it. Over time, it becomes unstoppable.
The reason is volume. Volume of interest can crater entire nations, or build dynasties. Given enough time, it generates hundreds of thousands of percent return — gains unimaginable in any stock market index (or any financial market for that matter). It compounds on itself…
It can completely destroy businesses like Kongo Gumi (the oldest company in the world, dating back over 1,400 years) or it can build empires, like Warren Buffett’s Berkshire Hathaway (incidentally, Buffett is one of only a handleful of people in the world who uses the time value of money to earn a 30% dividend from his Pepsi stock, while everyone else is earning 2.79%).
Either way, you can’t avoid it. You can’t stop time. You can’t stop the constant pounding of interest. The only decision you have to make is whether you want it working for you, or against you? And, if you don’t make the decision to make it work for you, the default is it will work against you…
Want more financial tips like this?
Then sign up and get daily emails delivered straight to your inbox: