Interest rate differences over the time period

Financial Independence, Uncategorized

Last time I showed a graph and calculations of how a doubling of a bet for every cricket wicket or golf hole can make you a millionaire many times over if you allowed to take the bet over a large number of wickets.

The bigger part however is that the real advantage comes as you take the period over a longer term.

This time I will show you how the value of the bet can change the value of your earnings.  As I have repeated many times in my blogs earlier also, the value of money you end up with is has low co-relation to the amount you start with but rather with the duration and the rate of interest.

So this time also we will start with only one dollar to start with and show you how the value of the amount you get depends at the rate at which you grow your bet.  We will consider 8%, 15%, 17% and 24%.  There is a reason for choosing these rates.

Typically a long term bank deposit in India can get you about 8%.  Its almost guaranteed to not fail. So you don’t have to take any risk to get this kind of return.

15% -17% is the average return that the Indian stock market has returned on average.  24% is the kind of lowest return the investing gurus  have been able to generate from the stock market.

Wicket in cricket / hole in golf Rate of interest 8% Rate of interest 15% Rate of interest 17% Rate of interest 24%
1 1.08 1.15 1.17 1.24
2 1.1664 1.3225 1.3689 1.5376
3 1.259712 1.520875 1.601613 1.906624
4 1.36048896 1.74900625 1.87388721 2.36421376
5 1.469328077 2.011357188 2.192448036 2.931625062
6 1.586874323 2.313060766 2.565164202 3.635215077
7 1.713824269 2.66001988 3.001242116 4.507666696
8 1.85093021 3.059022863 3.511453276 5.589506703
9 1.999004627 3.517876292 4.108400333 6.930988312
10 2.158924997 4.045557736 4.806828389 8.594425506
11 2.331638997 4.652391396 5.623989215 10.65708763
12 2.518170117 5.350250105 6.580067382 13.21478866
13 2.719623726 6.152787621 7.698678837 16.38633794
14 2.937193624 7.075705764 9.007454239 20.31905904
15 3.172169114 8.137061629 10.53872146 25.19563321
16 3.425942643 9.357620874 12.33030411 31.24258518
17 3.700018055 10.761264 14.42645581 38.74080563
18 3.996019499 12.37545361 16.87895329 48.03859898
19 4.315701059 14.23177165 19.74837535 59.56786273
20 4.660957144 16.36653739 23.10559916 73.86414979
21 5.033833715 18.821518 27.03355102 91.59154574
22 5.436540413 21.6447457 31.6292547 113.5735167
23 5.871463646 24.89145756 37.00622799 140.8311607
24 6.341180737 28.62517619 43.29728675 174.6306393
25 6.848475196 32.91895262 50.6578255 216.5419927
26 7.396353212 37.85679551 59.26965584 268.512071
27 7.988061469 43.53531484 69.34549733 332.954968
28 8.627106386 50.06561207 81.13423187 412.8641603
29 9.317274897 57.57545388 94.92705129 511.9515588
30 10.06265689 66.21177196 111.06465 634.8199329

If you see the difference between the 8% and 24% rate of interest is 3 times.  However the outcome is 63 times different over 30 units.  If you were to look at an even larger period like say 50 units the difference will come out to be 1000 times.

The human brain is not able to comprehend this major magic of compounding when trying to compute mentally.

Now look at the columns which are with showing you 15% and 17% interest rates.  While the difference is only 2% if you see the outcome after 30 holes at 17% you have earned double then at 15%.  If you were to extend this to 50 holes then the amount at 15% would be 1083 while at 17% it would be 2566. A difference of 2.5 times.  Why am I showing you this.  If you pay 2% commission to someone to manage your investment then you lose that kind of money. 

The people like Warren Buffet or Raamdeo Aggarwal or Mohnish Pabrai have become so exorbitantly rich because they manage their own money and manage it a higher rate of interest for a longer period of time.

However even if you think you cannot manage on your own, its better to get some reputed ETF so that the cost of managing is very low.  Only in cases of some high growth markets look for managers to manage specialised funds.

Another thing you will notice from the table – till about the 4th unit all the values were not very far apart. But see how the 24% chart suddenly breaks into another orbit after the 10th unit and the gap widens so dramatically.

The biggest lesson in this post and the earlier one is however that you need to start at the earliest, with whatever you have and let it compound over a long period of time.

For those of you who are more visually inclined, you can have a look at the chart below

Screenshot 2019-03-24 at 10.53.09 PM

Till next time choose the right interest and keep it for a long long time

Carpe Diem!!!

Compounding & the relevance of period

Financial Independence, Uncategorized

Last time I had written about why human beings are attracted always towards the complex items and don’t understand simple concepts like compounding.

One thing which comes to my mind is the fact that compounding works on 2 key parameters….longer periods of activity(of years in case of money)  and higher rates (of interest in case money).  While the human brain is very good at figuring out things quickly by identifying patterns, it gets completely foxed when complex calculations need to be done.

For the first 4-5 periods of activity, there is no appreciable change if you when you start with small values, because of which it seems that nothing worthwhile is happening.  So if you have started with 1 Rupee after 5 years if you only have got 2 rupees you are not able to comprehend how big the number can become. Its only later that the fun starts taking place.

Look at the table below.  The IPL cricket season is about to start in India and people in India could relate to this idea. It could be wickets in a game of cricket or holes in a game of golf.  We will start with a dollar for every wicket / hole taken in a match and double it for the next one till we take 18 holes in golf or wickets:

Wicket in cricket / hole in golf Amount doubled after every wicket/hole
1 1
2 2
3 4
4 8
5 16
6 32
7 64
8 128
9 256
10 512
11 1024
12 2048
13 4096
14 8192
15 16384
16 32768
17 65536
18 131072

Would you wager a bet with anyone on doubling the amount on each outcome.  You wouldn’t if you see how what starts with just a dollar becomes more than One hundred Thirty thousand dollars.  As a matter of fact Tony Robbins has a post specifically on this idea.

If you were to take this forward to a 22nd wicket/hole can you comprehend the value – it will be …it will be 2 million (20lakhs)….and by the 30th hole it would have become…Half a billion dollars (or 500 crores).

Warren Buffets actual growth of wealth has been after the age of 60 because of this phenomenon.  Its the age of the investments that have enabled the compounding to start playing a role.

Think about it.  If you were to ensure that you were to keep money for your child from the time she is born, you will make her a real rich person by the time she is 45-50 without her doing anything….at all.

For those of you who are more visually inclined pls have a look at the chart below

Screenshot 2019-03-17 at 10.22.33 PM

Next time we will take the same example by comprehending different interest rates and show how the different rates can change the graph.

Till next time.

Carpe Diem!!!

Golf & lessons in investment

Financial Independence, Uncategorized

One of the items in my bucket list for a very long time- and I have one large bucket list that I need to cover- was that I wanted to play golf.

Last weekend I accidentally ended up at a golf resort. We were planning to go to a city about 300 km from where I stay but for some reason we decided we did not want to go that far for the week end.  So we saw a place comparatively closer and went to the Lemontree Tarudhan Valley resort.  This resort overseas a 9 hole golf course at place which is about 15KM from Manesar in Gurgaon.  When I had booked the hotel I did not know that the resort was overseeing a golf course.

I have a habit of always asking at the reception, when I check – in, on things do and places to see nearby.  There were the standard things which you get to see at a resort like a club to play, swimming pool etc.  But what struck me was when the person at the reception said they have a trainer who can help me learn golf.

Animesh playing golf

The picture above is, me taking my first lesson of golf.

Since I have never played golf before the first thing the coach over there did was place about 50 balls in front of me, which I was to only hit without bothering where the ball went.

When you watch people playing soccer, basketball  or hockey or cricket you see a lot of running around the field all the time.  You get to see the sweat on the players and how they need to keep themselves hydrated.

On the other hand when you watch people play golf on television, it feels like a such a slow paced game with very little effort.  But golf is anything but relaxed.  Just hitting 50 balls was enough to get me exhausted.  When I tried moving a little faster I just hit the ball into the ground, so I had to be patient and plan my shots.  Also it was so tiring that if I did not pace myself, I would not last through the game.  So patience was an absolute virtue and planning your shots with the “hole” in mind was important.  Even how I moved my body weight before hitting the ball was enough to get the ball moving in a totally different angle.

Aren’t these the exact same things I keep ranting about in these blog posts.  Asking young folks to have patience, plan their investment with their goals in mind and that compounding can play magic if you give it a long enough runway.

Golf cannot be learnt in one day. If you have to get anywhere worthwhile you need to dedicate a lot of your time by playing regularly and for a long period of time.  Which is the same in investments also.  You need to keep at it.  You need to pay yourself first before you pay anyone else and you need to pay yourself regularly.  This is where SIPs (systematic investment plans) can help.  The automated system of SIPs ensure that you invest for yourself before you can even think of spending it anywhere else.

There is another thing that investments help you do.  They allow you to think of having big bucket lists and give you the capability to slowly keep ticking items off your bucket list as you achieve them.

Golf is an expensive sport but the advantage is that, because its expensive, few people can afford to play it.  That makes it exclusive and that’s one of the reasons why it is said that maximum number of deals get struck while playing golf.

On the other hand compounding and investment do not need you to be a rich person to retire rich.  What you need to do is start early, so that you give the compounding engine enough time and you need to keep an eye on the net interest you are earning.  One of the richest people in the world was Sir John Templeton, when he died. However he started his life as a conductor but ensured he was investing about 50% of his income.  You can read his story in the book by Tony Robbins – Money Master the Game.

In some other posts I will update you on the items which are still on my ever-growing bucket list and the ones I have already completed and the ones which are work in progress.

Till then…