Pensions, Exponential Growth and Investing
How past exponential growth can mislead you in making wrong investment decisions.
New Investor: I just heard about company Y whose share price has grown exponentially over the past 10 years. I never invested in my pension over the decades and being ten years away from retirement, I am nervous that I will retire poor. Investing in company Y seems to be a saviour. If I take all the money in my savings account right now and purchase X quantity of company Y shares traded on Z stock exchange, I will be able to make up for lost time; I will retire rich.
Me: Oh no. Don’t invest in a publicly traded company just because it has grown exponentially in the past. As Smil Vaclav says below in his book Growth,
Taking temporarily high rates of annual exponential growth as indicators of future long-term developments is a fundamental mistake—but also an enduring habit that is especially favored by uncritical promoters of new devices, designs, or practices: they take early-stage growth rates, often impressively exponential, and use them to forecast an imminent dominance of emerging phenomena.
It’s incredible how some financial advisers use exponential growth to forecast the share price of publicly listed company. It’s also interesting how humans fall for this quirk of using exponential growth as definite future indicators.
New Investor: So what do I do?
Me: Speak to a qualified financial advisor and invest in learning about personal finance.
New Investor: Thank you.
Note: This is a fictional story but the lesson remains the same. I am not a qualified financial advisor so take my post above with a pinch of ………..
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