Power Of Compounding
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Power of Long-term investing
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Albert Einstein called compounding the eighth wonder of the world. And just how smart Albert really was can be gauged by the following story.
This is a story in which a simpleton of a king lost a well-fought game of chess to an ordinary farmer.
The king asked the farmer to choose his reward and all that the farmer asked for was 1 grain of wheat for the first square of the chess board, 2 grains for the second square, 4 grains for the third, 8 for the fourth and so on and so forth for all the 64 squares.
The king was very happy for being let off rather lightly and readily granted the wish. The real snag came when he tried to settle the claim.
He required
18,446,744,073,709,551,615 grains of wheat!
Now isn't that mind-boggling?
Let me try to be more concrete
There are about 25,000 grains in 1 kg of wheat.
king required about 7,37,870 million tonnes of wheat to fulfill his obligation
Now, here are some statistics for comparison.
Our total national agricultural produce (wheat, rice, sugarcane, cotton, etc.) in the year 2004 was around 200 million tonnes. The required quantity of wheat is about 3,690 times this amount.
Even all the wheat produced by man from all over the world, ever since he learnt the art of cultivation will be far less than this quantity
If the king had decided to settle this liability in cash, say at a super wholesale rate of Rs 3.50 per kg, he would be required to pay Rs 25,82,54,417 crore. This is over 2000 times the Indian Gross National Product, which is the total value of all, industrial as well as agricultural, goods and services produced by India.
What happened there was that the smart farmer used the power of compounding to his advantage.
And such is the power that the king didn't know what hit him
Realise that things were fine till the first few squares. It was only by the 10th square or so that it went out of hand.
0 0 0 0
1
5 4 3 2
In fact, long-term investing and compounding are two sides of the same coin - one cannot exist without the other.
-
Power of Long-term investing
-
Albert Einstein called compounding the eighth wonder of the world. And just how smart Albert really was can be gauged by the following story.
This is a story in which a simpleton of a king lost a well-fought game of chess to an ordinary farmer.
The king asked the farmer to choose his reward and all that the farmer asked for was 1 grain of wheat for the first square of the chess board, 2 grains for the second square, 4 grains for the third, 8 for the fourth and so on and so forth for all the 64 squares.
The king was very happy for being let off rather lightly and readily granted the wish. The real snag came when he tried to settle the claim.
He required
18,446,744,073,709,551,615 grains of wheat!
Now isn't that mind-boggling?
Let me try to be more concrete
There are about 25,000 grains in 1 kg of wheat.
king required about 7,37,870 million tonnes of wheat to fulfill his obligation
Now, here are some statistics for comparison.
Our total national agricultural produce (wheat, rice, sugarcane, cotton, etc.) in the year 2004 was around 200 million tonnes. The required quantity of wheat is about 3,690 times this amount.
Even all the wheat produced by man from all over the world, ever since he learnt the art of cultivation will be far less than this quantity
If the king had decided to settle this liability in cash, say at a super wholesale rate of Rs 3.50 per kg, he would be required to pay Rs 25,82,54,417 crore. This is over 2000 times the Indian Gross National Product, which is the total value of all, industrial as well as agricultural, goods and services produced by India.
What happened there was that the smart farmer used the power of compounding to his advantage.
And such is the power that the king didn't know what hit him
Realise that things were fine till the first few squares. It was only by the 10th square or so that it went out of hand.
0 0 0 0
1
5 4 3 2
In fact, long-term investing and compounding are two sides of the same coin - one cannot exist without the other.
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