Gaurav goel

The Magic of Compounding

While I was growing up, I heard a story of a cruel King. He promised a poor Brahmin, who saved his life, to ask for anything in return. Brahmin took out a chessboard and placed a grain of rice on the first square. Then he asked the King to give him double the grain quantity (of the previous square) in the next square and so on till all the squares are filled. King laughed out loud at Brahmins folly only to regret later. 64th square required           9,223,372,036,854,780,000 grains. All the grains of his kingdom could not fill the last square alone!!

Of course that’s a story. I wish to share a fact before I jump to the actual point I am trying to drive. A baby starts off her human journey as a single cell in her mother’s womb and multiplies rapidly. One becomes two, two becomes four, four becomes eight and so on. By the time she enter the real word, she has billions of cells in her body!!

We often hear huge wealth creation in real estate over the years. Similar is the case of investments in some blue chip stocks, if investors had invested long time back and continued to stay invested even today.

This is the power of compounding. Principles of compounding apply universally and investments are no exception. Unfortunately, the concept remains attractive in thesis but poor in investment application. In reality, greed & fear, mercilessly attack our mind and don’t allow the magic to happen. Wise men, who have cracked the code, have created wealth others can only dream of.

Multi baggers are not created overnight. One needs to have a monk-like stoic devotion and conviction towards his stock pick. The clutter that comes along with the purchase needs to be shunned. The concept is based on sound fundamentals. It has to be backed by strong research and macro analysis. Remember, compounding can create havoc in reverse direction also. It can erode your wealth to an insignificant number if your selection is not good.

The longer you stay, more lucrative your rewards are. You must have heard several stories of children opening old, wretched wooden box of their father upon his demise, to discover some physical stocks valued currently at some mind boggling number. While that changed their fortunes, it won’t change yours. Most of us don’t have that king of fortune. We have to create our luck and for that we need to change our mindset.

So let’s assume you have achieved nirvana and magic potion of compounding has unfolded. What do you do? When do you enjoy the fruits of your penance? Well, answer is simple–as and when you need it and as much as you need it.

In good old days, it’s said, people made a huge effort to search the elusive philosopher’s stone-chemical that converts metal into Gold. The truth is that this stone rests within us. Compounding needs to be understood and reside permanently in our mind. If this is understood well, treasure of wealth is not far away.

P.S- There are some basic thumb rules related to compounding, one can easily remember. Rule of 72 which give time in years when 72 is divided by the rate of interest at which money is doubling. Similarly the magical figures of 114 and 144 give the time frame in which money triples and quadruples respectively when divided by the interest rate.

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