Are you smart enough to do compound interest?

(You’ll be shocked at how dumb some of you are!)

Silver Stock Report

by Jason Hommel, March 14, 2008

Everyone else out there is writing about how gold topped $1000/oz.  Bor-ring!  Besides, you don’t need me to tell you that.  How about some real insight into the gold and silver market?  Here it is, if you can understand it.

This weekend, I went skiing up at my cabin in Tahoe.  I had a blast, skiing on my semi-new two year old parabolic skis.  Since I understand a little bit about the power of compound interest, and I try to apply it in my life in various ways, I have continued to lift weights to build my strength over the years, and I was skiing great, as I was stronger than ever, now at age 37!  Unfortunately, my gut is compound growing, too!

While I was there, since gas is so expensive and my propane might have been running low, I was starting a wood fire with some old newspapers from last year.  But I ran across a headline that literally stopped me cold:  “Many people seem ill-equipped to responsibly handle money”.

Ironically, I suppose that should be said of the large brokerage houses that are going bankrupt this year! 

But the article itself was more shocking.  It said only 80% of people could calculate that 10% of 1000 was 100.  Wow.  There are some real dummies out there if 1 in 5 can’t figure that out.  How do waitresses survive if 1/5th of their customers can’t figure out how to tip 15-20%?  Maybe the dummies can’t afford to go out to eat?  Sorry, I’m getting sidetracked.

Here’s the real shocker from the article:  Only 18% of people could calculate how much money you would have, if you started with $200, and saw it gain 10% twice in a row! (Answer below)

Again, only 18% of these people could correctly calculate that simple compound interest problem.  Can you?

No wonder so few people ever save for retirement!  They are too stupid to calculate the positive benefits of saving money, and investing wisely.

These people were not drunken college students, nor were they ignorant grade schoolers.

These were 1700 people in their early 50’s, as measured by the University of Michigan’s Health and Retirement survey in 2004!  I’m not making this up!  This article was in the Sacramento Bee, Sunday, March 11, 2007, on page D3.

Older people, not yet so senile that they might have an excuse, really are that stupid!  People in their 50s, I know, are my main readers!

What the Devil is going on?  Are people in their 50’s all on Prozac or Lithium or something?  I don’t understand how they can be that dumb!  Does that mean I’m the dumb one?  My mind reels at the implications, and I contemplate the horror!  But I score so well on IQ tests!

(But my most appreciative readers, I know, are far smarter than average, as I discovered recently, the average IQ of my paying subscribers was about 130, which means they are two standard deviations above the mean or average, which means they are very smart, smarter than 95% of other people!)

(Answer from above: 200 x 1.1 x 1.1 = 242)

So, I’m sitting there, dumbfounded by my new knowledge about how dumb people are, and I’m wondering what the implications are for the silver market.  And I’m wondering what I need to teach people, because boy, are people dumb!

So here is my conclusion:

Look, if you are among those 82% of people who cannot do the compound interest problem, then you have no business buying stocks in companies.  Ever.  Not by my list, not from anyone.  Never buy stocks if you can’t do basic math, OK?!  

It would be like trying to play solitaire without knowing the rules of the game!  It would be like trying to play chess with no knowledge of how the pieces move!   It would be like trying to run without legs!  (No offence to amputees.)

If you can’t do basic math, your only investment should be physical silver, or gold.  Otherwise, people will just take advantage of you.  As for me, nearly 35% of my net worth is in physical silver.  My money in my IRA is in the mining stocks.

Here’s some incentive for saving money:  Every time you spend any money, you should ask yourself whether it is something you want or absolutely need to live.  If it’s a “need”, then you must buy it.  

But if it’s a “want”, then you should ask yourself regarding the cost of the item, “Would I rather have 100 times that money later on in life?”  If your answer is yes, then don’t spend, but rather, save the money, and use that same money to buy silver, instead.

That’s the power of compound interest.  They say that if you save about $10,000 by the time you are 18, then you will have 100 times as much, about $1 million, by the time you retire, as long as you make 10% (more than inflation) per year.

If you don’t understand compound interest, (or even if you do understand it very well, and especially if you are a wise investor) then I suggest that you bookmark a compound interest calculator, as I have, and play with it often, as I do.  See one of these:

But look.  Silver is moving up now, from 2003 to 2008, from $4.15/oz. to $21/oz. now.  Over that time span, what was the average annual percentage gain?  You don’t have to do the math by hand, instead, use a compound interest calculator.  I’ll wait.  In fact, I have to use one of those web sites myself.

The first link is the best for this problem.  I note that silver is up 406%, and is up an average of 38.3% over those last 5 years.  In 2005, I predicted that silver would probably go up by 30-60% per year for at least 15 years, and I listed many reasons for that estimate, and I’ve been right on target:

Do you know what would happen if silver goes up 30% per year for the next 15 years, and what that could mean for you?  Go ahead, calculate it.  I’ll have to do it myself.

If you save $5000 in silver, at 30%, for 15 years, you will have $255,929!
$50,000 gives you $2.5 million.
$500,000 gives you $25 million!

If you can’t do simple compound interest, you shouldn’t be in stocks, you should only own silver.  

Can you imagine how much higher silver prices would be, if all the deceivers were not convincing people to own stocks that are going down?  Can you imagine what would happen to the silver market, if 80% of the money owned by CalPERS, the retirement plan for public employees in California, was kept in silver by the people who earned the money the first time, as it should be?

CalPERS has about $260 billion, last time I checked.  80% of that would be $208 billion.

The silver market is very tiny.  Only about 650 million ounces are produced each year by the mines, yet industry consumes about 950 million ounces, consuming all that is mined, and more.  How do they do that?  They also consume the silver that is recycled (250 million oz.), and the silver that is sold by nations (about 50 million oz.).  In 2006, only about 50 million oz. of silver, net, was purchased for investment, which, at $20/oz., is $1 billion.

Can you imagine what will happen to the price of silver, as people begin to put their retirement money back into silver, as it should be?  The state workers of California alone could move the silver market for decades to come! 

But imagine what will happen as $13.5 trillion (which is $13,500 billion) in money in the banks is sold to buy silver.  (As it must, since silver is rare, and going up in value, and paper money is plentiful, and going down in value.)

Here’s another math problem:  How much money in the banks, expressed as a percent, is buying silver each year?  It’s 1/13500.  Expressed as a percent, that’s 0.007% if I’m not mistaken.

Silver will keep going up, if only because it is going up, which will attract world-wide investment interest and investment purchases. 

If the dummies don’t understand that, at least the 18% who can do compound interest, will.

My God, do you realize what will happen when 18% of people buy silver, since only .007 percent of money in the banks is buying silver in recent years?

I mean, by the time 0.1% of $13,500 billion is invested in silver, which is $13.5 billion, I would expect the silver price to be about 5-10 times higher than it is today, at $20/oz, which would be?  I’ll let you figure it out.  (Hint: I’d expect it’ll be in the hundreds!)

And if you think bonds are the place to invest right now, then you must be more cynical than I am, because you must be betting that 99.992% of money is held by people who are too stupid to ever figure any of this out! 

As for me, I’m the optimist, I’m saying that people are not that dumb! 


Jason Hommel