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!!!

How do you take the message of compounding to the “bottom of the pyramid”

Financial Independence, Uncategorized

The concept of the “bottom of the pyramid” was brought forward by the late management guru C.K.Prahlad.  His basic premise was that people with lower incomes also have aspirations which are similar to the middle class.  If the consumer companies can produce products in lower volume packaging and lower margins, then the absolute amount of profit that companies can make will be dramatic.

The typical case was how the volume of shampoo usage went up dramatically when companies started creating sachets which were priced at Rs1/- per sachet (about 10ml).  All brands eventually followed this model eventually and everyone’s business in FMCG space grew dramatically in the 90s and thereon.

During most of their interviews, stock market stalwarts like Ramesh Damani or Raamdeo Aggarwal or Mohnish Pabrai talk that becoming rich is not very difficult.  You just need to make sure that you are compounding at an average of about 24% per year and in 30-40 years what ever value you start you would be about 10000 times in 40 years.  Most of these stalwarts and people like Waarren Buffet have been compounding on an average more than 35% for a long period of time.  At 24% also, if you were to start with $100 today you would have $1million in 40 years.  These stalwarts don’t tire telling everyone willing to given them an ear that compounding is the only magic that anyone needs to understand.

I have tried many a times to tell my maid, the Uber drivers whom I sometimes interact with and a lot of people from the lower income group whom I come across about the power of compounding.  Everyone listens but then no one takes action to start investing.  They are unhappy about their situation but they are not willing to take action.  They are willing to work harder to earn a little more but they are not willing to start investing and let money work for them.

Which brings me to the question – are we happier being in a rut which we know off but not willing to take action to get into another situation which may actually make us better.  Is this true only of people at the lower income levels or is it seen at other levels also.  To be fair there are a lot of aspects of life, where I also tend to be stuck in inertia and don’t take action to move forward because I prefer the known compared to the unknown.

I think we take the simplicity of compounding lightly.  Like all universal principles, relativity, 80/20, compounding is also so simple in its depiction but very difficult for most people to comprehend in its applications. Even well educated colleagues of mine think that compounding results which I show them are good to look at when seen on an Excel sheet but in reality its not possible.  If we keep investing aside, the whole Japanese concept of Kaizen is based of very small incremental improvements having a dramatic result because the benefits compound when done continuously over a period of time.

To return to the topic, how do you take the message of compounding to the masses for every aspect of our life, not only in aspects of finance but for every sphere of life.

Have any of you had success with taking the message of compounding to the masses.  Would you be willing to share it with everyone.

Look forward to hearing from all of you.

Carpe Diem!!!

Sponsored meals for one year for 12 kids.

Financial Independence, Uncategorized

In my blog of 10th December 2018, I had mentioned that using Paul Dunn’s concept of Buy1Give1( in a slightly different way- because I don’t have a business of my own – I intend to give away a dollar for ever new follower of my blog/website and Linkedin –  and achieve my objective of donating to my charities on a regular basis.

Based on the number of followers I have today on my website/blog and the new followers on Linkedin, I have added a dollar for each. I have been able to donate meals for one year for 12 kids on Akshay Patra.  I have a target to reach the capability to sponsor one meal for one year for 100 kids.  If the number of followers on my blog/website and Linkedin keep growing I should be able to hit this number also pretty fast. Right now I am active only on these two.  Slowly I will raise my activity levels on other media as I see success.  If you are interested in knowing more about the work the click Akshay Patra.

If you compare Tony Robbins’ agenda he wants to be able to feed 6-8 million people in a year.  He has written 2 books Money Master the Game and Unshakable and donated all the proceeds to help achieve that objective.

My  achievement seems so small compared to what Tony is doing.  But as I mentioned, I got inspired by Paul Dunn’s Ted Talks that even very small regular interventions can dramatically improve the world.  If you have not heard Paul’s 4 Ted talks, I sincerely suggest you watch them. So what I used to do haphazardly and irregularly earlier, now becomes a system.

In multiple posts earlier, I have mentioned that I follow Mohnish Pabrai, the US based fund manager who runs Pabrai investments.  He runs the Dakshana foundation to which he is every year donating a certain portion of his wealth.  Mohnish is an ardent follower of Warren Buffet and like Warren, wants to donate a certain portion of his wealth every year. This foundation helps poor, deserving  kids in India, who have potential, to get trained so that they can appear for entrance exams and qualify for the best engineering (IITs) and medical institutes(AIIMS) in India.

Now Mohnish has a major lament, which I have noticed in his YouTube videos. He believes that given the speed at which he is donating his wealth year-on-year to Dakshana, there will not be enough deserving kids left who have potential to be trained.  His feeling is that there are not enough deserving kids coming out of the government/municipal education institutes in India.

One of the reason for that, is that poor parents don’t send their kids to school even though school education in India is now virtually free in all states. They want the kids to work and earn some money, so that the family can be fed.  The more hands working the more possibility of earning. If we eliminate the challenge of feeding the kids, that too with a very nutritious meal, then these parents will also send their kids to the government schools. Akshay Patra kind of organisations are helping achieve that goal. Once the kids are fed well, they will be more healthy, have less sickness and  they will hopefully also learn well and then the Dakshana Foundation  kind of organisations will get more kids to train for higher eduction.  Once more kids get educated they will bring up the “standard of living’ of their families.  From the ground-up we will be able to take India and the world forward

Again the 12 that I have sponsored or the 100 that I have a target for, may not create a positive Tsunami but if more people like me keep doing these small interventions we will make this world a better place.

Till next time then….

Carpe Diem!!

Books that have influenced my financial education – part 2

Financial Independence, Uncategorized

After the first 4 books that I listed in my last post which had predominantly US based authors, the first book this time is written by an Indian author.

Saurabh Mukherjea’s – Coffee Can Investing – Saurabh had written 2 books before this book.  Both the books were very focussed on the Indian equity market.  This book however provides a very simple framework of identifying stocks in the Indian context and also builds a case for how asset allocation has to be done with the Indian context.  If you are an Indian investor wanting to get into equity markets then this book is a must read.  I have given copies of this book also to young men who are getting into college or coming out of college.  The other thing about this book that I liked is the typical Indian examples. In India food inflation, medical inflation and inflation related to commodities like petrol can play havoc with your savings. By taking specific examples of Indian people and their saving patterns he goes about constructing portfolios.  Therefore I would reiterate, if you are an Indian investor then, this book is a must read.

The next book which is written extremely well is by Joel Greenblatt – The Little Book of Investing – which still beats the market.  This book explains the concepts of Return on Equity / Return of Capital Employed along with the value of a stock so simply that once you read this book you can read through most financial ratios and easily get an understanding of the relative value of the companies. The tables and the resources however are not of value to an Indian investor.  But if you understand the concepts then you can individually build the relative tables on your own.  One of the challenges which I faced when employing his simple technique was that he suggests selling off the complete portfolio every year.  Since I was buying shares over a period of time, putting this into action became difficult.  However inspite of this, I would strongly recommend, this book to everyone who is getting in new to investing.  Like Dhando Investing by Mohnish Pabrai, which I had mentioned last time, this book explains concepts with simple examples, so a must read.

The third book this time is by Tony Robbins again – Unshakable.  Another of Tony’s masterpieces, simply written, explaining the working of the markets.  Key thing especially if you are in the US market is that every 3 years markets will tend to fall.  Psychologically if you understand this concept then you can drive big returns in the long run.

The fourth book – it is supposed to be the guiding book for Warren Buffet and a lot of other famous investors – is the Intelligent Investor by Benjamin Graham.  Quite frankly when I read this book for the first time, I was new to investing in equities myself.  A lot of the concepts that he brings out were totally new to me and the book didn’t appeal to me much.  One of the reasons for that was also the fact that this book also had the US context in mind where the markets are more mature and hence not growing so rapidly.  The Indian markets on the other hand are still nascent and reporting is not transparent. Another fact is that the Indian markets are now in a growth phase. It was only after I had spent a couple of years trying to see how things work that I reread the book and understood it. There a lot of practitioners in India also who would like to buy a company at 5 cents to a dollar as suggested by the author.  However I have personally preferred to look for growth stocks, even if they are expensive but they should have ethical management teams.  In India I think that is the bigger challenge.

I will continue with some more books in my next post.

Meanwhile if you can recommend some books to me on investing, please out it in the comment box.

Till next time then.

Carpe Diem!!!