Using the conquered foe to augment one's own strength: Utilizing Long-Term Compound Growth to Expand Assets

"Using the conquered foe to augment one's own strength"

(The Art of War : Waging War)

Sun Tzu believed that after defeating the enemy, one should utilise the captured chariots and soldiers to strengthen oneself further.

The profits that a company earns can be distributed to its investors in two ways: one is returning the profits to shareholders in the form of dividends, and the other is retaining earnings for reinvestment to enhance the company's intrinsic value and profitability. As the company reinvests, its intrinsic value increases, making the stocks held by investors more valuable.

The concept of "Using the conquered foe to augment one's own strength" in Sun Tzu's Art of War emphasises that when investors profit from their investments, they should reinvest those profits to acquire more quality companies, thereby increasing their returns and growing their investment portfolios.

The "snowball" theory is Warren Buffett's strategy of "Using the conquered foe to augment one's own strength" This theory can be summarised as: let your investment principal grow like a snowball. The core of the snowball theory is long-term investment and long-term holding.

Buffett said, "Investing is like rolling a snowball. The important thing is finding wet snow and a really long hill." In a speech at the University of Nebraska on October 10, 1994, Buffett stated, "Compound interest is like rolling a snowball down a hill. At first, the snowball is small, but as long as it rolls long enough and sticks tight, the snowball will become larger and larger."

Buffett uses the snowball analogy to describe the accumulation of wealth through the long-term effects of compound interest. In his snowball theory, the snow needs to be wet enough to stick, and the hill needs to be long enough for the snowball to grow bigger. To make your investments grow like a snowball, you need to find companies with high annual returns, or companies with strong cash-generating ability, and use the long-term compounding effect to grow your assets.

Compound interest is essentially earning interest on interest. By reinvesting both the principal and the earnings from previous investments as the principal for the next investment, the principal increases with each investment. The formula for compound interest contains a powerful mathematical amplification effect. Although each increase in earnings might seem small, over time, the numbers can become astonishingly large.

Buffett's snowball theory emphasises the importance of long-term investment, high-quality investments, reinvestment of earnings, and the compound interest effect. By selecting quality companies, holding them persistently, and patiently waiting, investors can grow their investment principal like a snowball, ultimately achieving outstanding investment returns. Buffett believes that time is a friend to quality companies, not an enemy. He has stated that he will never sell his major stocks, even if their market prices are extraordinarily high. These companies, including Coca-Cola, American Express, and Gillette, provide Buffett with a steady stream of cash flow, which he uses to purchase other high-return quality stocks, thereby continually expanding his investment portfolio.

Warren Buffett's investment success can be simplified into three core strategies from The Art of Invest: 

first, ensure that your investments do not lose money; 

second, wait for the opportune moment to invest for easy profits; 

and third, reinvest the profits to grow stronger. 

Buffett has consistently adhered to these three strategies, repeating them in a cycle, and continuously expanding his investment portfolio.