Developing an Intuitive Feel for the Mechanics of Growth
Investment decisions and planning are all concerned in one way or another with one concept: Growth. Stock investors examine the earnings growth of firms; portfolio planners estimate portfolio growth. And ultimately growth in the real value of your assets is the central focus of your endeavors and concerns.
But most investors do not have an intuitive feel for growth, particularly over longer time periods. If someone were to say, for instance, that you can double your money in nine years or quadruple it in 18, most people would have no idea whatsoever of the annual growth rates that would produce those results [it would be 8% in both instances].
Needless to say, if you are completely in the dark when confronted with this issue, you have little basis for judgment.
Developing an intuitive feel for growth figures and knowing how to perform relatively simple calculations to estimate growth rates will provide you with a valuable basis for making informed decisions.
For these decisions, precision—determining a growth rate down to the last decimal using a calculator or computer spreadsheet—is much less important than deriving an approximate figure that allows for a realistic assessment.