The most important formula in investing EXPLAINED

In this video I am going to explain to you why this formula is important and how understanding it completely changed how I think about money and investing.
// Table of Contents
00:10 Personal background story
01:14 Formula of investing explained
02:54 Example in action from Warren Buffett
03:31 Lessons I learned
04:33 Useful resources
DISCLAIMER: This video is a resource for educational and general informational purposes and do not constitute actual financial advice. No one should make any investment decision without first consulting his or her own financial advisor and/or conducting his or her own research and due diligence. There is no guarantee or other promise as to any results that may be obtained from using this content. Investing of any kind involves risk and your investments may lose value.
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[@MichaelJayValueInvesting]

When was your a-ha moment on money? What videos do you want to see next?

[@williamlasalle9179]

Nice video. It would be good to see more videos focusing on the math behind investing.

[@MichaelJayValueInvesting]

Glad you liked it! I'll plan to do more in this style in the future.

[@stevenupton7825]

my ah a moment , it was 2002 , i was 45 ,leveraged £200k that was $300k back then , i had a wife and 5 kids, and was totally broke everything that came in ,went out on bills, money just was nt working for me , so i decided to do it differently , i sold houses and stock and became debt free ( luckily they were profits not losses) then the surpluses started rolling in, i feel 20 years younger ,concentrate on all the things that matter not just money, and i m happier than ever , i ve moved onto legacy building and philanthropy

[@jmanakajosh9354]

Karma brought me here I was thinking about this equation litterally a couple weeks ago and bam! Here's your video!

[@NOTANOTHERCOOKINGSHOW]

I'm super dyslexic so math has always been my weakness. Numbers, words. So I'm always looking for helpful information I can absorb. My college finance investor didn't teach this as clear as you! Great video! Would love to learn more about these cryptocurrencies. Helping understand that!

[@MichaelJayValueInvesting]

Glad you found the message clear. Yes, a lot of times discussion of of financial topics can get complicated. My hope is to try and keep it simple so everyone can learn from it.

[@jeremysimms9563]

"Yeah, I was a weird kid." Great little bit of humility and humor there, along with several powerful lessons on investing. "Why buy the shoes when you can buy the company?" Fantastic.

[@MichaelJayValueInvesting]

Haha Thanks Jeremy! Glad you enjoyed it. This is certainly an older video, but I would like to do another one like it at some point.

[@DrRobertMPick]

Just saw this. This is spot-on and excellent. I didn't like math and didn't kick it in until after H.S. But in college I was a Chemistry major and a Physics minor - so I had to perform in math regardless! But I loved Organic Chem so that made me weird to my friends. Fast forward. For some reason I got a late start in investing. The a-ha moment for me is when a Bank loan officer 20 years ago said to me, "don't you want to ever retire?!" It scared the sh*t out of me - and Bingo! All I lecture on today is Ethical Business Management, Motivation, Growth & Wealth Creation for Dentists and Dental Specialists. I cannot preach enough to them that yes I made up a lot in volumes, but I can NEVER make up for what I lost in Compounded Interest! I agree with you 110 per cent and I tell all of my young clients and my lecture audiences to start investing as soon as you can! .....like in utero! LOL! Keep up the great work/videos!

[@lindleydykema10]

Im a mechanical engineering student, I'm currently a differential equations and calc 1 tutor. I literally love math and have been looking for ways to apply it in every day life

[@raven80nl13]

I did ok in math. But I love this. If I understand the formula correctly it's one investment and not a monthly investment. My aha moment actually came at work. After so many hours of work I made a lot of money, but I also knew it would go away at some point. That things would go back to normal. With a portion of this cash I invested in a stupid stockapp and lost 85%. Learned very quickly what margin calls are. So I wished up, started learning about stocks and what made them tick. And more important what made me tick. My flaws, my shortcomings, my strenghts. I learned patience. Not to run after everything I hear and look at what happens with stocks after news. I am an investor for 4 months now in the outside app stockmarket. I have learned a great deal about the stockmarket. Do I know everything? Do I feel 100% secure when I purchase shares in a company? Do I know if stocks will go up or down? No, no I don't. But I learn every dat and get more and more experience looking up info, read up on companies. I read ratios and understand them. Will I get wealth? Maybe, I don't know. Apperently 10% make it in the stockmarket. All through different roads. I found a road that suits me fine. Hope you all find your roads too

[@MichaelJayValueInvesting]

Great personal story! Thanks for sharing. We all have different paths so it helps gain perspective when we hear from others. Personal development is a never ending journey, the more you learn, the more you realize how much you still don't know! And yes, you are correct, that formula is for the growth of a single one time investment. (Formulas for monthly investments are a bit more complicated!)

[@AXColin]

My a-ha moment was when I learned, Why paying interests (credit cards, auto-loans) when you can be paid interests each month! Thanks Michael, I'm exiced to see more videos from you. Albert

[@MichaelJayValueInvesting]

One interesting way to think about it is are you a net payer or net receiver of interest? Most people start off paying interest, but over time you want to move yourself over to the receiving interest side.

[@richardb7726]

“Why own the shoe when you can own the company” ... because Nike has a PE ratio of 64 and is massively over valued. Buy the shoes, perhaps go for a run, then buy Nike when its price has gone down. Mathematics will show you how, that’s why I love math.. new shoes, cheaper shares plus a better runner. Great vid by the way

[@MichaelJayValueInvesting]

Nowadays I am in agreement with you there. Used to be a runner in high school (track and cross country). Back then Nike shares were trading at much lower P/Es.

[@yugdesai863]

Mean while Tesla: (My profile pic)

[@ResourceTalks]

Compounding interest separates the rich from the broke. Albert Einstein once indeed said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”'Funny things is I've always love math myself, and I finished business school (degree in accounting) in 2.5 years because it really went well for me with math, financial algebra has always been my favourite subject while everybody used to hate it.

[@MichaelJayValueInvesting]

Sometimes it is those skills and jobs that are least desirable that are most rewarded! Yes, when you are in debt, compound interest works against you (this is very destructive to wealth building at higher interest rates). Wow, 2.5 years is fast! You probably saved a lot on tuition too.

[@jjbuckner]

"Why own the shoes when you can own the company" I say that to myself when I am wanting to buy something. Great video Michael. I am also a fellow Math nerd hints why I got a degree in Engineering lol.

[@MichaelJayValueInvesting]

Engineering is tough! One of my best friends got her degree in biomedical engineering. Statistics major for me :) True, if I don't eat or buy groceries this week, then I can pick up a few more shares of Kroger...

[@stevenupton7825]

how about a robert kiyosaki answer borrow 1k off HSBC @3% BUY HSBC shares at 6% yeild , but buffett did say if your smart enough to leverage you don t need it , if your not you should nt use it

[@selby99]

It's amazing how compound interest can be your best friend or your worst enemy. It depends on your choices.

[@MichaelJayValueInvesting]

Yes, this is definitely something you want working for you, not against you. And you are right, it is in our control to become on the side of the receiving end.

[@stevenupton7825]

take a penny and compound it at 100% per day and see what you get, theres no shortage of capital only ideas, the ears of corn on a chequer board is biblical, great vid

[@MichaelJayValueInvesting]

I would like to do another video like this in the future when I have time. Like you say there is no shortage of ideas here :)

[@coolvideos2829]

How can we predict the market using math? I believe it's possible through Fourier series and a few other views. Please help 🆘 I just don't understand how to get the wave form of the market and then calculate a point in time to predict the price. Itself sounds simple but idk what to

[@kenshinhimura5906]

In all my studies so far, I never knew this formula...Gonna plug it into my excel sheet now. Keep up the good work.

[@Lawgiver19]

my aha moment was when I approached by a MLM it wasn't for me to be sure but I saw how much money some of them were making and I knew there was something out there for me. 2 years later I'm almost debt free. It's why I created my channel to teach others to not fall into the same traps I fell into.

[@MichaelJayValueInvesting]

Congrats! Being debt free is a huge accomplishment. Yeah, MLM schemes always struck me as dubious, though if you make it in early, some people can do well. Wouldn't recommend it though!

[@maltatravel]

So i was in fundementals math when i was a kid we sucked so bad we were the repeaters...lol... but today i am a changed person no math genius but i am managing to return my principal investment in just 10.5 years through compounding, just worked it out, thanks for the lesson!

[@financialthesis8971]

This video was awesome Micheal, I love the math behind the valuation of investments and capital, perpetuity and annuity calculations are my favorite. Anyway great video and congratulations on the amazing channel growth you have been having :) keep grinding !!

[@MichaelJayValueInvesting]

That's great, if you like the way the formulas were presented here, I'll try to incorporate that style into future videos. Thanks for the support!

[@py8130]

Great video！Just wanted to point if out a few things. 1. The year that principle equals to that year's interet is actually year t+1, not year t. 2. After t+1 year, each year's interest will keep increasing, and getting bigger and bigger, definitely NOT hold at the value of principle value P.

[@scottscriticalmass]

Michael - You're doing a great job of sharing your stock ideas while sprinkling in videos with very unique content as well... The best new channel out there in my opinion. Keep it up because you're doing awesome! I'm not sure of your age, but I wish I had as much figured out as you at that point in my life. Cheers...

[@MichaelJayValueInvesting]

Scott, thank you for such kind words, they mean more than you know. Glad you are liking the content!

[@thecooperacademy]

Interesting that you loved maths that much as a kid! Your videos are good quality by the way Michael, they flow really well. I can see why you got that100 subs so quick.

[@MichaelJayValueInvesting]

Thanks Cooper! Means a lot coming from you. I don't know if there is a math gene, but part of me thinks I just really enjoyed the dopamine rush from solving a problem correctly.

[@thecooperacademy]

Yea it can be pretty satisfying.

[@themoneymindset1293]

Compound interest is so very powerful! Especially when you have time on your hands. Starting as early as possible is essential! Another great video by the way keep them coming

[@MichaelJayValueInvesting]

Thank you! It is incredible the difference a single year can make over a long period of time.

[@mitchellstewart6745]

Great video mate thank you for a clear mathematical formula and some good insight into compounding and laws of the number in relation to stock markets 😊

[@BobBrownonline]

Hey Michel just came across your channel... you are off to a great start my friend! Wish I paid more attention to math! LOL great video thanks for sharing! Just subscribed and looking forward to watching more! Keep putting out great videos my friend.

[@MichaelJayValueInvesting]

Thanks Bob! I appreciate the feedback and am glad you enjoyed the video! I'll have more coming out this week, so I look forward to seeing you around. Welcome to the channel!

[@sithembilemabunda7024]

So the initial investment doesn't matter, be it $1000 or $100 000. t remains the same for both if the rate of return is the same?

[@donzandunga1515]

Thanks so much

[@jeronimomurielmonterodelco1803]

Thanks!

[@daydreamerforex3720]

my aha moment came when I was 31 years old, few months after release of this video.

[@gerardshorticultureculture7579]

Moment was a few years ago. Thanks for posting this

[@mikcon63]

This is like looking up a cooking recipe and having to skip past the 3 page back story about the time the author went to Italy

[@HonestFinance]

Is compound interest really a theory?

[@MichaelJayValueInvesting]

Yes! While this is simplified example, financial mathematics branches out in to many fields including quantitative finance and actuarial mathematics. Spent most of college studying this so it does exist!

[@pacomonescazon3949]

Michael, great video man. I really liked it, brilliant combination of solid technical background, interesting content, plus a few personal touches that made it really entertaining. Of course i subscribed. Ideas? Maybe share stories of successful investors / investments stories of them the likes of WF with Coca Cola.

[@MichaelJayValueInvesting]

Thanks for the suggestions! I will plan to incorporate more of those stories in future videos. Your feedback really helps as we start to grow. Welcome to the community :)

[@chakkritchroenlai]

What this formula called?

[@vegastreasuresjewels4115]

As GaryVee would say "Practice Patience." Reinvest any dividends as long as you can. Resist the temptation of buying dumb sh*t now so you can enjoy the rewards later. May I suggest doing a simple video on "Would You Take $1 Million Now or A Penny Doubling For 30 Days?" It blows me away that people are never taught this basic concept of compound interest & how much more $$$ they can have in the long run.

[@MichaelJayValueInvesting]

Another great suggestion I will have to add to the list, thank you! Having patience is one of Gary's most underrated messages. I think for those of us that are younger, we look up to our idols and want to become great like them as soon as possible. But we might forget that it took them many years of hard work to get to where they are at.

[@johnzuluaga-romero9216]

I've seen this video and I must say, I never knew the second formula, but I always knew the compound interest one. Why don't they teach this in school?

[@MichaelJayValueInvesting]

Agreed! I really wish there were investing classes taught in high school. At least there is KZbin!

[@johnzuluaga-romero9216]

Michael Jay - Value Investing yup

[@colensopaulholder6366]

Hi Michael. I was playing around with your formula and noticed if your rate of return is larger than 100% t becomes negative. Is there away around this?

[@MichaelJayValueInvesting]

Correct, that is because what the formula is really solving for is the exact time that the investment will be returning, at an annualized rate, the amount of your original principal. If your rate is r=100% per year, then you are already at that time. So effectively your investment is already returning your initial investment per year at t=0. If you can find any investments that consistently return 100% per year, you will be a very rich man! (Realistically though, you would be dealing with return rates much lower.)

[@thespaniard977]

where should someone start when it comes to learning these things ?

[@lifeforgod07]

My aha moment was when I read the intelligent investor on really how to achieve great rate of returns

[@MichaelJayValueInvesting]

Great moment! That is a fantastic resource for every investor. One which has stood the test of time over all these years.

[@silverhawk7324]

Nice channel, I appreciate the fact you are sharing your knowledge with us. That being said I always treated large lump sums of money as not something to be spent but as a potential avenue for a revenue stream.

[@MichaelJayValueInvesting]

That is a very good mindset to have that will serve you well in life!

[@silverhawk7324]

So I am 25 and have about 200,000 net worth. Majority of it is in Vanguard Low cost ETFs with a free advisor. Do you suggest that I start doing research in stocks and purchase good companies through a platform like Robinhood?

[@MichaelJayValueInvesting]

That will be up to you! You already have a great head start at 25 so nice job there. Low cost Vanguard ETFs are a solid core holding. If you wanted to supplement that with a few individual stocks you think are a good value, I think that would be perfectly reasonable.

[@2MinuteRatio]

Excellent video, morale of the story "start with more than $1,000".

[@MichaelJayValueInvesting]

Haha and start early! It would be nice to have a billion dollars lying around ready to invest, wouldn't it?

[@2MinuteRatio]

Indeed, but it does help the novice investor to think about saving more, learning and then investing. Great topic and excellent execution!

[@MichaelJayValueInvesting]

Very true, my next video will address that topic!

[@lifeforgod07]

Haha I made about the same money detailing cars at 16 years old. I thought I was so cool walking around with $500-$600 of cash those days and "employing" my friends lol

[@MichaelJayValueInvesting]

One of my friends did that in high school and college, a lot of money to be made if you put in the work! He loved cars so he really enjoyed the work too (or as much as one can for detailing).

[@schr4nz]

Great video, as soon as I saw the formula I was convinced to click, I loved compound interest problems in school. Subscribed! You have a lot of content that interests me, a quick question though if you are able to field it... I'm from Australia, and whilst I am going to look to purchasing stocks here I'm also interested in whether you have any ideas/tips on how a foreign investor can get into the US market? Reliable online brokers etc? I guess this is also an opportunity for you to break-down your YT demographics and consider if you have enough people overseas to warrant a video on the subject (maybe you already have?) (if not I'll do as much research as I can and pass the information on for you to disseminate)... In any case, thanks a lot for the great content my dude

[@MichaelJayValueInvesting]

I have been meaning to do more videos like this, as they are generally well received. Glad you enjoyed it :) As for demographics, I don't think I will have the time to make a specific video for the logistics of investing as an international, but I think I can point you in a good direction. Check out Brandon from Aussie Wealth Creation. His channel is more focused on investing in Australia and may be able to better answer your questions. Hope that helps!

[@gabryelpaulo3721]

So you're saying that we should Always buy the dip ?

[@huntervargo4237]

I like this alot

[@MichaelJayValueInvesting]

Glad you enjoyed it! if you haven't already, be sure to subscribe as I'll be posting 3 new videos each week. Welcome to the community :)

[@Noisey_fox]

What the.. Where did n come from.

[@videos-vy5kr]

Sir colour prediction trend of trading video upload sir

[@bailbondpartners]

1 question :Has the formala made you a multimillionaire

[@undergroundxv]

my aha moment on money was last year .. day-to-day i was 16 . now i'm 17 and started trading forex . i made 27$ on my first day last week !

[@MichaelJayValueInvesting]

You will be well ahead of your peers starting to learn so early! Never done forex trading before. Do you also trade stocks or are you focused on learning forex trading currently?

[@undergroundxv]

Michael Jay - Value Investing i'm kinda feeling lost , i love stocks and i learned about them more than Forex , but i'm not in USA so i can't open a RH account . So yeah..

[@facttechz9265]

What is meaning of -In?

[@MichaelJayValueInvesting]

ln = natural logarithm. This is just the algebraic formula needed to isolate the time (t) we are solving for.

[@ikaustralia]

You're good =)

[@MichaelJayValueInvesting]

Glad you are enjoying the channel! I'd need to brush up on my Russian to watch yours :)

[@ikaustralia]

Michael Jay - Value Investing Yeah, man looking forward to more of your videos. You provide great insights!

[@schpoingle]

in 20 to 50 years 1000 will buy a soda

[@debrajdas4527]

The video starts from 01:15

[@pringlelays159]

Ah yes i love integrals and derivatives

[@MichaelJayValueInvesting]

Also a fan of math? When in calculus, I remember I used to practice taking derivatives and integrals in my head. It's been a while so that would be much more challenging now. Glad you enjoyed the video!

[@pringlelays159]

Michael Jay - Value Investing yep i love math!

[@lukacosic9784]

great video! Something bugs me about all your videos, and I think it’s your sitting position. It looks like your chair broke and you’re at your desk shoulder high. Try moving the camera away a tiny bit to get a better shot of your upper arms and hands?

[@MichaelJayValueInvesting]

Thanks for the feedback! This video I was actually closer to the camera than my previous two. Did you prefer it farther back like in the 3 Value stocks video? Still working on optimizing the viewer experience with the videos, so info like this helps.

[@lukacosic9784]

yeah that one was better!

[@Tonicmud]

i congratulate you on liking math lol

[@joefrascino4546]

thats high way robbery level loan lol

[@highspeedsuicide]

Most important investing formula huh?. It just gives us an interest return value. People don’t generally call putting money in a high internet bank “investing”. That’s banking.

[@themanifestationofsonsofgo1340]

Suppose P=$5000, t=1, r=0,07 ...given formula A=P*(1+r)^t : A= $5000*(1+0,07)^1= $5350 hence made $350 in year 1 however if we apply the formula (P*(1+r)^t)*r we get $375.5 in year 1, is this formula an estimation? @Micheal J