Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak in the last week…
- As humans, we don’t only imitate good actions, but we also have a tendency to follow wrong actions and inactions of fellow humans. The Bystander Effect .
- Switching costs create moat but what creates switching costs ?
- A combination lock should really be called a permutation lock. Find out why .
The Elements of Investing is a short, straight-talk book about investing and saving. While talking about power of saving and compounding, authors, Burton Malkiel and Charles Ellis, write –
Time is indeed money, but as George Bernard Shaw once said, “Youth is wasted on the young.” If only we could all train ourselves at a young age to know what we know now. When money is left to compound for long periods, the resulting accumulations can be awe inspiring.
Benjamin Franklin provides us with an actual case. When Franklin died in 1790, he left a gift of $5,000 to each of his two favourite cities, Boston and Philadelphia. He stipulated that the money was to be invested and could be paid out at two specific dates, the first 100 years and the second 200 years after the date of the gift. After 100 years, each city was allowed to withdraw $500,000 for public works projects. After 200 years, in 1991, they received the balance—which had compounded to approximately $20 million for each city. Franklin’s example teaches all of us, in a dramatic way, the power of compounding. As Franklin himself liked to describe the benefits of compounding, “Money makes money. And the money that money makes, makes money.
The story underscores the huge significance of time in the process of compounding. It doesn’t matter at what point in the market cycle you start your investing journey. What matters is that you stay invested and adhere to a disciplined schedule of regular saving and investing.
Luck in picking the right time to invest is all well and good, but time is much more important than timing . There is always a good excuse to put off planning for retirement. Don’t let it happen to you. Put time on your side. To get rich surely you have to do it wisely—which means slowly—and you will have to start now.
When it comes to compounding there is something special about the number 72. Do you know the rule of 72? It unlocks the mystery of compounding. Here’s how it works –
X × Y = 72. That is, X (the number of years it takes to double your money) times Y (the percentage rate of return you earn on your money) equals . . . 72.
Let’s try an example: To double your money in 10 years, what rate of return do you need? The answer: 10 times X = 72, so X = 7.2 percent.
Now try it the other way: If someone tells you a particular investment should double in four years, what rate of return each and every year is he promising? Answer: 18 percent (72 divided by 4 = 18)
Every investor should know the rule of 72. It’s a nice heuristic to quickly compare available investment options.
Stimulate Your Mind
Forget the stock market for now, and consider some amazing content we read in recent times…
- Studying related skills or concepts in parallel is a surprisingly effective way to train your brain. The Interleaving Effect.
- Integrity not only simplifies your life by making it easy to come to a decision, but it may keep you out of trouble. Isaac Asimov on integrity over honesty.
- What Warren Buffett learned fromTed Williams, a baseball player, about decision making. Circle of competence .
- Choose the volatility you are happy to live with. An interview with Kenneth Andrade .
Compounding is powerful and don’t forget the rule of 72.
Be kind to others, and to yourself.
Stay happy, stay blessed and keep poking!
Vishal & Anshul