These are crazy times. When you hear thousands of people dying everyday, in the news, it’s natural to feel dreadful about your personal future. You can be fearful or you can be hopeful its a choice that you make everyday.
However history has had various events and the human race has adapted and come back stronger always. Whether these have been related to hurricanes or the plague the human spirit has always ensured that we survive. Till we find a cure, there’s only one way to handle this. Let’s ensure that we maintain social distancing and bring down the compounded daily growth rate of the virus.
The tide will turn – Always
So during this time you could see all the problems, you could binge on watching movies and serials on TV and feel even more depressed.
Or you could think of what else you can do to brighten your future. This is not about just positive attitude. Its about affirmative action. The surfer takes advantage of the tide to get his momentum, the airplane takes advantage of the air resistance to fly.
Get prepared while you are locked down so that you can be stronger to face the future. Get trained – there are so many universities offering free courses. Or get trained on products – so many consultants, OEMs are offering free training.
I have myself have taken a few technical and non-technical trainings during the last 4 weeks and also got some accreditions.
We have a bright future ahead, let this “reset” time that nature has given us, not go waste.
I have always harped on why the rate of interest and the tenure are the two most critical factors to make the law of compounding be a major friend for you.
In India we have had a lock down for the last 3 weeks. So we are all working from home. But on weekends, because there’s no place to visit or friends to meet, we are getting a lot more time to do research. On one of these research journeys a few days back I was reading about the Hemchandra – Fibonacci series.
It seems about 3000 – 4000 years ago when there was very little written text as a medium of transfer of knowledge, Indian sages used to build the scriptures in such a way that there was scientific pattern so that the texts were rhythmic and easier to learn.
So what’s the series – we will not go into the mathematical part of the background – but concise to say that it defines any number to be the sum of the immediately preceding two numbers. So if your first number is 1 and the second number is also 1 then the third number will be (1+1) meaning 2. The fourth will be the summation of the 3rd number and the second number (2+1) equaling 3. The fifth will be summation of 4th plus 3rd (3+2) equalling 5. Now starts the interesting part the sixth number is fifth plus fourth (5+3) equals 8 and the 7th number is (8+5) equaling 13…..see the image above
This rattled my mind completely. Which brings me back to the introduction. I had always stressed that starting early even with a small amount and being invested over a long term are the basis of wealth creation. Which meant that those who started late in life on this journey could not benefit from the “number of years” part of the equation.
But understanding this sequence changed everything…..to explain this let’s make a few assumption. For comparison we assume that the first person starts at age 25 while the second one starts at age 40. Let’s call the first person Anil and the second Tom.
Now Anil starts investing USD(or Rupee) 500 per annum from age 25 till age 57 at a rate of interest of 15%. At age 60 he will have a corpus of USD(or Rupee) USD (or Rupee) 505436 while he would have put in only USD (or Rupee)16500 (500*33 years), the compounding would have created the magic to turn this into such a large sum. This is what I have been harping over the last few years to everyone who is even willing to give me half an ear of attention. Even with small amounts if you start early you can become wealthy because of compounding.
Now comes the interesting part. Suppose you are in your mid 30s or early forties, you can still make a similar or larger amount of corpus for yourself if you follow the Hemchandra-Fibonacci concept.
At age 40, Tom starts with investing USD 500(Rupee) in the first year at the interest rate of 15%. He has the same agenda to have a corpus by age 60 and invests till age 57. In the second year he again invests USD (or Rupees) 500. In the third year following the principle he adds the first 2 years investments and invests USD 1000/-. In the fourth year he invests 1000+500 (Adding the previous 2 years) equaling 1500/-. In the fifth year he invests 1500+1000 (adding fourth year plus third year) equaling 2500/-. In the sixth year he invests 2500+1500 (adding the investment of fifth year with the fourth year) equaling 4000/-. If he continues in this fashion by the eleventh year i.e at age 52 he would have amassed a larger corpus than Anil at age 60.
So what’s the catch here. The catch is that you have to maintain the disciple of ensuring you are investing the sum of the previous two years. As an example in the eleventh year of the above situation with Tom, he would have to invest 44500/- and over the years he would have a total sum of 116000/-
I have not included the maths of how I have made the calculations, but if you are interested, I could share them with you separately.
Now knowing human nature its very difficult for human beings to ensure discipline of increasing the investments to be the sum of the previous 2 years ( Read Charles Duhigg “The Power of Habit” or Marshal Goldsmith “Triggers”). Second the physical ability to earn so much money that you can spare a summation of the previous two years is quite difficult except if you are an entrepreneur in a high growth market with a high growth product or service (what Richard Koch calls the STAR principle).
For most mortals its better to start early and put investments in automatic route in a Systematic Investment Plan so that the money gets puled out of your account before you get to use it. Its easy and because you don’t have to think, it gets done. But if you have crossed the age of 35, you don’t need to lose heart. As long as you can continuously increase your annual investment at a significant rate you could still meet your long term plans and retire rich.
I have always spoken about the magic of compounding. Knowing the interest rate and the tenure can help you generate wealth.
However today all over the world you are seeing the negative impact of compounding. The corona virus is following the same compounding logic. You can use the same rule of 72 to determine how soon something will double. Wherever the the rate of growth has been allowed to cross a threshold it suddenly starts doubling every few days.
Countries like the US and Italy and overall Europe where there was a delay in putting lockdowns in place, the rates have galloped to almost 30%/day. By the rule of 72 it means that every 2 odd days the number of cases is doubling.
What has to be understood is that medical infrastructure, facilities. and staff, cannot keep growing at the same rate at which the virus is spreading. So the rate at which deaths will take place going forward is going to be even higher. The medical infrastructure needs respite if it has to be able to take care of people. In developed countries, the population is dispersed and the medical facilities are very good. For developing nations like India where the population density is so high and medical infrastructure is still not so good, it’s a time bomb.
Since there is no cure yet for this, the only way to handle is by ensuring reduction in contact between people.
Now that’s the good news.
Since it can only spread through contact, you can dramatically cut the rate of growth by not coming in contact with another human being. And since the compounding equation is exponential in nature you can take benefit of reducing the spread dramatically.
If the rate of growth is brought down from about 30%/day to 1%/day then it will take 72 days for the number of people infected to double. If you bring it down to 0.1%/day, it will take 720 days for the infected people to double. That will then ensure you are able to take care of the people infected better.
The PM of India along with the government of has been taking pro-active measures to ensure that we keep the growth rate low and has also put a 21 day lock down to essentially cut the growth rate. But somehow there are still people who are not realising the gravity.
I have been locked in my house for the last 8 days except to bring essential items like milk and bread but I still see some people walking in the open and talking to others in the open without masks and essential safety measures. I can understand about the poor, uneducated people who don’t understand the gravity, but I see even well educated people doing the same things.
Not sure if you have read the book “Triggers” by Marshall Goldsmith. If you haven’t, highly recommend you read it. In chapter 2 of the book – he talks about belief triggers that stop behavorial change – and one of them which come to my mind because of which people are not willing to change – item 5 – ” I shouldn’t need help and structure” . Most people overestimate themselves and don’t like simplicity and structure.
The virus spread can be brought to a grinding halt with such a simple solution of just staying locked up….but we have a problem adhering to this simple solution.
I just hope you and your families are safe and continue to stay locked to bring the growth rate down dramatically.
Last week we had Women’s day. There were a lot of articles on women empowerment, how women have broken glass ceilings etc. While a lot of women today have become very capable leaders with very high education, we still don’t teach our daughters, sisters, lady colleagues on the simple concepts of creating wealth for themselves.
While general principal’s of compounding remain constant for everyone, for women there are certain nuances which women face depending on the stage of life they are in.
However the biggest mind-block I have seen with women is that they think investments, finance are related to maths and a lot of them think they are not capable of doing financial planning. It could be because they were not good in maths and therefore cannot understand the nuances of investments. They would rather leave it to their father or husband.
In this post I will talk about a girl who’s just finished her education and has decided to go for a job and she thinks marriage is 5-7 years away. She may have taken a loan for her education or has done her basic education and wants to fund her higher education on her own so that she does not need to take a large loan.
Now inspite of whatever I write, the first thing to keep in mind is don’t do anything which causes you to lose your sleep. Having said that however be a little open to trying new things. Maybe just that one new thing that you try may change your life dramatically.
So I will talk of just 3 simple concepts to keep in mind
1. Rule of 72 – everyone of you has a calculator. All you have to do is remember that this magic number can tell you everything about doubling your money.
If you know the amount of interest that an investment is giving then you know the approximate time it will take to double your money.
a. Your savings bank deposit gets about 3% annual interest. So if you have 100 in your account and you don’t touch it for one year then at the beginning of the next year you will have 103. At this rate of interest if you want to find how long it will take to double and make the amount 200 you just take your calculator and divide 72 by 3 to get 24. So if you don’t withdraw the money from your bank for 24 years you will have 200 in your bank.
b. Banks also have fixed term deposits where they give 6-7% annual rate of interest…suppose you were to put the same 100 in such a deposit you would need to divide 72 again by 6 and in 12 years you get 200
2. Rate of interest – which brings us to the second important item which is rate of interest. The bigger is the number by which you divide 72, the lesser is the amount of time to get to double your money. Which means higher the interest rate you will take less time to double your money. Generally speaking you need to keep one thing in mind….as the interest rate starts climbing higher the amount of risk that you take with your money is also higher.
3. Identify your goal – if you don’t have your goals defined you are not be able to define what is the right amount of distribution of investments that you need to make. Then use the following graph to map to your goal.
So if you are this young girl who wants to say go for her MBA after getting a work experience of 4-5 years and you need USD 50000/- as an example. The brown line on the map is the number of years you have for your goal and the blue line shows the kind of interest you need. So on the yellow line plot the 5 years and on the blue line straight above the 5 corresponds to about 15% interest. So if you need to get USD 50000/- in 5 years from now and you get an investment which is giving you 15% interest then USD 25000/- invested today will give you USD 50000/-, 5 years from now.
Now lets use the same picture and see what happens if you are only getting interest rate of 10%, then on the blue line check for 10 and then put a pencil on the brown line right below 10 and it will show you it could take you seven and half years. So now you may need to save more than 38000/- dollars so that 5 years from now you will have close to USD50000/-.
You will see that in the picture while the blue line goes as a straight line, the brown line is non-linear. This is something we will explore in a later post.
ANIMESHJMATHUR 