I was talking about the power of equity over long periods of time. He was not very convinced – he is a Marwari aged about 60 and a money lender to boot.
I was surprised because a few communities which have compounding in their blood – and that too a Maheshwari (sorry, I am not being parochial but just a point of view). He said “I don’t think 15% over 50 years is a very great power of compounding”. I said look if you put away Rs. 20000 a month for your grandchild today in a decent fund without guessing how much return you will get she will have a stunning amount in 3 digit crores at her age of 60 (she is a about 4 months old now) EVEN IF YOU STOP after 10 years.
He asked “will she really have Rs. 100 crores at her age of 60”. I said I can guarantee that – but it is of no use, both of us would be dead. I said actually if you do a Rs. 20k per month sip for 12 years, I think she will have Rs. 1000 crores – if the sensex were to do what it did from 1979 till today.
He said but our family has been doing money lending for the past 50 years and we have not seen this kind of money. I said “but you do have Rs. 20 crores…apart from the expenses that you have incurred”. He said “we have been compounding at 25% per annum.
I said now you are showing your innumeracy. He said….no no we have been compounding at 2% per month.
So i had to call Excel to help me. I asked him if his family had Rs. 100,000 in say 1960. He said ‘surely yes’ apart from a house in Kolkatta – a kothi as it is called. I said if your money was compounding continually at 24% for the past 59 years…it should be worth more than Rs 1000 crores. Do you have that much?
He said NO. Much lesser. I asked him “what happened”. He said “we must have lost some money…” I said so the effective rate is NOT 24% per annum..it is much lesser. So when compounding over a long period of time you should not use a very high ‘n’. Actually it is not necessary. It is ‘n’ which is doing the magic. Of course a higher ‘r’ helps, but it is not necessary.
He asked me “If it is so simple…why are many people not doing it”. I said this is what Charlie Munger says “because it is so simple nobody does it”. People do not like to get rich slowly. Mostly people want to run a marathon like they are running 42 races of 1 km each. No clue what is the hurry.
The other problem with semi educated people is that they will get into arguments like the following:
- will we really get 18% p.a for the next 50 years
- will compounding work when return fluctuates
- what if taxation is introduced in equities
to me these are unnecessary and stupid questions. The take away from an article has to be ‘what will this do for you’. So instead of getting into some stupid arguments, the most important thing to do is to start investing. Just do it.
If your children are 30 years old, we are talking of compounding for 30 years, and if your grandchildren are under 10 years of age we are talking of 50 years compounding. Instead of wondering whether compounding works for equity (hey it has worked for a few of us, and we are living proof of low brain, low r and high n).
But Subra please tell me which shares to buy….or should I invest in a mutual fund.
Ha..forgot to tell you…I can introduce you to an Ifa who can help you. However if you are a DIY investor I am sure you know which fund to invest. For a few of my friends I had created a portfolio of equity…but hey I am now a ‘catalyst’ – I just excite you to do it, but I am only a trainer…..no longer a broker/adviser.
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