I met a well qualified man from one of the academic institutions. He is very lucky that he had a stint abroad and far more importantly his father has left him 2 big houses in Cuffe Parade and each house is worth in 2 digit crores.

He did not have much cash – but of course had a huge rental income over and above all a very satisfied family. He was very disappointed that he did not have much money – say compared to his friends in the Industry. And he said / felt that he had less money because he had earned less. So much for a person who was good at math.

I explained to this well qualified (mathematically educated) person the following:

You started earning about 33 years ago. Assuming that you had started a SIP at the age of 23 (he is now 54 so about 31 years ago) of an amount of Rs. 6k per month (he confirmed that he could afford it) and had increased it by 8% every year, and invested in the BSE sensex and it had grown at 18.5% p.a. (including reinvestment of dividend of course, we are talking IRR) the amount would have grown to about Rs. 15 crores.

However if he had grown it at 5.5% p.a. it would have grown to about Rs. 1.7 crores.

This academic had made 3 major mistakes:

– started investing late (lost the power of compounding)

– choose wrong asset class (family loved the government, and typical education class they thought talking money was stupid)

– even in the asset class of debt chose bank fixed deposit and paid Income tax at top rates, thus hurting the compounding further.

Sad is it not? that professors of math, bankers, etc. do not understand:

– start early

– be in equities (do SIP in a good fund)

– do not interrupt the compounding

– defer taxation to the point of withdrawal (debt mutual fund) instead of being taxed on an accrual basis (bank fd vs bond fund).

Is it too much to ask?

http://www.subramoney.com/2009/04/real-estate-or-sensex/