The story
Meet Kyle MacDonald. On the surface, Kyle is an average Canadian just doing the best he can. He lives in a small Montreal apartment with his girlfriend, and he's growing tired of an average life and doing average things. So one day, Kyle picks up a shiny red paper clip and decides to trade it -- for a house. One year should do it, he thinks, so he places a Craigslist ad asking for something -- anything -- in return for his humble paper clip. Two days later, he is the proud owner of a pen shaped like a fish.
Kyle's little project quickly grew and took on a life of its own. Two trades after the pen, he had earned an outdoor stove, which quickly turned into a full beer keg with accompanying neon sign, and then a perfectly operational snowmobile.
By now, Kyle's quest had attracted the attention of the Canadian media, and his search for the next trade item was followed daily by thousands of loyal blog readers. A skiing trip turned into a recording deal, and then one year's access to a rent-free, fully furnished apartment.
Alice Cooper and Kiss were both involved toward the end, and the penultimate trade was a rare snow globe in exchange for a movie role. Now the year has passed, and Kyle is the proud owner of a two-story house in Kipling, Saskatchewan, that used to belong to the city's mayor. He's been on CNN and MSNBC -- simultaneously -- and the humble paper clip has turned his normal life upside down and inside out.
Lessons learned
So exactly how great a return on your investments do you have to achieve if you want to turn a paper clip into a house? Well, let's see ...
One tub of 500 pastel-colored paper clips from Staples (NASDAQ:SPLS) runs you $7.98. That's $0.016 per clip, or 1.8 Canadian cents. Call it 2 cents to keep the math simple. Furthermore, a quick search for available housing in Kipling, Saskatchewan, points to the prize being worth about $54,000 Canadian. And Kyle pulled off 14 trades in one year to reach his goal.
So, the 14th root of ($54,000 / $0.02) = 2.88.
An average return of 188%, then, is enough to go through with the transformation from office-supply item to livable house. Yes, it's an impressive rate of return, but he didn't have to multiply his net worth by tens or dozens; less than three times the money on each trade was enough.
You're looking at the power of compound returns, my friend. It can work for you, too. OK, you won't match 188% average returns over any reasonable period of time, but then again, you won't start out with just two pennies, right? (The commissions would kill you.) So let's see what a few different levels of annual returns can do to an investment of, say, $10,000 over 14 years.
A savings account with a 2% interest rate will net you $13,194. Now, 32% growth is nice, but not if it took 14 years to get it. How about a simple index fund or a Spider (AMEX:SPY)? The market's historical average growth rate is often quoted as 11%, which turns $10,000 into $43,104 in our time frame here. Now we're getting somewhere! It's almost enough to buy Kyle's house.
Get Foolish!
Or let's say you can match the performance of Tom and David Gardner's Motley Fool Stock Advisor newsletter. Over four years of the service's existence, it has garnered 11.3% annual returns, giving us $44,764. But it's been an awfully tough market since spring 2002 -- the S&P benchmark has grown by only 3.4% ($15,969, stretched out from four years to 14). Tom and Dave have beaten that by 7.9 percentage points.
There are no guarantees in life, but let's imagine that the market downturn doesn't last for 14 years, and that our Foolish founders can keep up their market-crushing ways. That's returns of 18.9%, and we're sitting on $112,862 in the end. Buy Kyle's house, and another one just like it! I'll take that 10-bagger, thank you very much.
A percentage point here and there may not sound like much, but you can see the power of compound returns if you just play with your calculator a bit. Maybe it's time to start saving up those paper pennies and getting them into the market. The time to grow is now.
To truly benefit from the magic of compounding, consider a risk-free trial to Motley Fool Stock Advisor. Click here for more details.
Fool contributor Anders Bylund doesn't really use paper clips, because he prefers stapling his paper bundles. He owns none of the stocks or ETFs discussed today. Foolish disclosure will always be there for you, even when the market isn't.
