We always hear the rosy pictures about the Power Of Compound Interest right? In fact, there are many claim that Albert Einstein reportedly said “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pay it.” However, there is no proof on this that Albert Einstein said so (as per my knowledge).
Today morning I shared one image in the social media. The idea is simple -Rs.1 doubled each day for the next 30 days will create Rs.53 CRORES!! The image I shared was below one.
It looks surprising that Rs.1 on the first day will turn Rs.53 Crore on the 30th day right? Hence, with so much curiosity even many started to ask me WHICH SCHEME IT IS!
Such stories often published by sellers to generate their business. But we often miss the realities with this theory.
Power Of Compound Interest – NOT the 8th Wonder of the world!
Why I am saying Power Of Compound Interest is NOT the 8th wonder of the world when the whole world is claiming so?
In the above image, I intentionally not highlighted which is the REAL 8th wonder of the world than the resultant 8th wonder of the world i.e Power Of Compounding.
The real 8th wonder of the world is PATIENCE but not the Power Of Compounding.
There is no asset or product on this earth which can double your money on each second day. I also know and you all also know it very well. However, to highlight how the compounding works, I intentionally took the shorter period of 30 days.
Now to come into the real world, let us take an example of Bank FDs. Assuming that the current interest rate 7%. Then if you invest your Rs.1 in such FDs, then it approximately takes around 10 years. Hence, if do the same exercise of money double for every next 10 years, then to accumulate Rs.53 Crores from this Rs.1, you have to wait for around TWO HUNDRED AND NINTY YEARS!!!!
Let us increase our risk appetite and consider the return expectation of 10%, then you have to wait for around TWO HUNDRED AND TEN YEARS!!
Hence, as per me, THERE IS NO POWER OF COMPOUNDING if YOU DONT HAVE THE POWER OF PATIENCE inside you. If you really wish to enjoy the power of compounding from the above example of 30days, you noticed that you have to sit CALMLY for almost 95% of the investment period to enjoy the power of compounding in the remaining 5% of last years.
Let me give you one more example where I have written a post “How to create Rs.100 Cr for your child?“. I will share you how the patience works than the returns.
You noticed that there is no power of compounding effect for almost 10 years (I mean unnoticeable). However, you can notice it from 12-15 years onwards.
Same way, I have written one more post considering the EPF example “How to create ONE CRORE Rupees from EPF?“. Let me share the graph of that also here.
Here also, for the first few years, there no visibility of power of compounding.
Hence, it is clear that you have to expect the power of compounding only for your long term goals which are more than 5-10+years and to enjoy the power of compounding, you must have the PATIENCE, which as per me is the 8th wonder of the world.
Again, as I shared recently in social media, even though such power of compounding magic looks like simple and easy to apply, the real-life scenario is not like that.
I am trying to quote few personalities views on PATIENCE and importance of that in investing.
During such up and downs, it is our patience that is of utmost importance. Joel Greenblatt once said
“The biggest challenge for investors is patience and that is in short supply. You used to get a quarterly statement and often throw it in the garbage; now you can check your stock price 30 times a minute. There’s a lot more data, a lot more ability to crunch numbers, and compare people. That works against investors, and patience continues to be the hardest challenge. It always was, but now it is even worse.”
When asked once about whether he was worried about a big drop in the value of Berkshire, Munger said…
Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has the quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.
Warren Buffett has also stressed repeatedly on the importance of patience…
The stock market is designed to transfer money from the active to the patient.
Conclusion:-To enjoy the COMPOUNDING effect one must have a great skill of PATIENCE. Otherwise, you never enjoy it. Hence, rather than the goal of enjoying the dreamy compounding effect, the path of the patience is very much important. Give the equal (in fact more) importance to the process than the goal.
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