At times, compounding can indeed seem like magic. When news recently broke that the Boston Celtics were up for sale, many were astounded by the potential price tag. The team, purchased for a “mere” $360 million in 2002, is now valued at a whopping $4.7 billion. Many pundits were clamoring over how the value growth was genuinely remarkable. At first glance, this 1,206% increase seems nothing short of miraculous. However, when we dive deeper, we discover that this astronomical growth is actually a testament to the power of compounding.
Compound growth occurs when the value of an asset increases not just on its initial value but also on the accumulated growth from previous years. It’s often described as “interest on interest,” and when annualized, it’s known as the “compound annual growth rate (CAGR).”
Let’s break down the Celtics’ valuation growth:
- Initial Value (2002): $360 million
- Current Value (2024): $4.7 billion (est.)
- Period: 22 years
Calculating the compound annual growth rate (using relatively simple math), we find that the Celtics’ value grew at approximately 12.4% annually. This means that, on average, the team’s value increased by 12.4% each year for the 22 years, and each year’s growth built upon the previous year’s total value.
A 12.4% annual return is impressive but certainly not unheard of in the investment world. For comparison:
- Microsoft (MSFT) has returned approximately 12.6% annually for the last 22 years.
- Despite its recent 20% single-day drop, Nike (NKE) has returned approximately 11.5% annually over the previous 22 years.
- The S&P 500 has historically returned around 10% annually.
So, when looking at why the Celtics franchise has grown impressively over the last two decades, the reasons are similar to why any investment has success. There are macro reasons and micro reasons. On the macro side, as a league, the NBA has done a great job growing the game domestically and globally. This has led to increased viewership and massive media deals. On the micro side, the Celtics organization has done a great job making a quality product, with two championships over the 22-year run.
So, what is the lesson for investors? The Celtics’ valuation journey offers a powerful lesson: consistent growth, even at seemingly modest rates, can lead to extraordinary results over time. If you had invested $10,000 in an asset growing at 12.4% annually 22 years ago, you’d end up with about $131,000. This is the magic of compounding at work.
While the Boston Celtics’ value increase from $360 million to $4.7 billion may seem like financial sorcery, it’s actually a real-world demonstration of compound growth. It underscores the importance of long-term thinking in investments and the potential rewards of patience and consistency.
As investors, only some will be able to own an NBA franchise, but all of us can apply these principles to our financial strategies. Whether through mutual funds, real estate, or other long-term investments, harnessing the power of compounding can help turn modest beginnings into significant wealth over time.
The next time you hear about a seemingly unbelievable increase in value, remember the Celtics and ask yourself: Is it really so incredible, or is it just the magic of compounding at work?
Economy
- Markets started the second half on solid ground. The S&P 500 was up 2.0%, the Nasdaq was up 3.5%, and the small-cap Russell 2000 was down 1.0%.
- The number of job openings rose by 221K from the previous month to 8.14 million in May, beating the market consensus of 7.91 million. It follows a downwardly revised 7.92 million in April, the lowest in three years.
- According to the ADP Employment Change report, private businesses in the U.S. added 150K workers to their payrolls in June, the least in five months. This was below forecasts of 160K and a downwardly revised 157K in May.
- The U.S. economy added 206K jobs in June, slightly below a downwardly revised 218K in May but above forecasts of 190K. April and May were revised sharply lower, down 57K and 55K, respectively. With these revisions, employment in April and May combined is 111K lower than previously reported.
- The unemployment rate in the U.S. rose to 4.1% in June, the highest since November 2021, up from 4% the previous month. This surprised markets, which had forecasted the rate to remain unchanged.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Technology were the top performers, while Energy and Healthcare lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased seven basis points to 4.27% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by high-yield bonds and government bonds.
