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!!!

Other articles, reports and videos that helped me

Financial Independence, Uncategorized

 

Photo by Pixabay on Pexels.com

If you have been reading my blog posts regularly, will remember that I saw one of my mutual fund investments suddenly after 15-16 years and the Rs2000/- I had invested had over the years become close to Rs90000/-.

After this I became a regular at trying to identify various mutual fund schemes and slowly building SIPs (Systematic Investment Plans – where monthly a small amount of money directly gets withdrawn from the bank and invested in the respective schemes). Even today this is an important piece of education for me.

This was a very good mechanism because it brought about a lot of financial discipline into my life and I slowly started accumulating wealth.  The good thing was that in 2013 when this dawned on me, the Indian equity markets were at a very low level and subsequent to that there was a rally over the next 5 years which helped me gain a lot in terms of reaching my goals.

Around 2014-15 I read the Tony Robbins book Money Master the Game. While this book is focused towards the US economy and the shares and financial markets in the US, there were some nuggets of wisdom in a few areas which stuck with me.  One of the items was how even a 1-1.5% reduction in interest over a long period of time can make a very large difference in the compounding machine.

In India the mutual fund industry is quite regulated by SEBI and the total expense ratios of schemes are quite well controlled.  Inspite of that the MF schemes can be charging upto 3 odd percent as their fees.  This got me thinking how far I can be from my goals because my compounding machine has this leakage of about 3%. ( I even had a whole blog post related to how small differences in interest rates over long time periods can have massive impact on your wealth)

But I did not know, how to pick stocks myself.  So how could I invest in equity.  That’s when I started scouting for books on investing.  These were the books I wrote about over the last few posts.  However most books were US based stock market related and I could not relate to the Indian markets.

While searching for some simple inputs I came across people talking about the letters written to the shareholders of Berkshire Hathway by Warren Buffet.  I would recommend anyone anywhere, if they want to learn about basics of investing in simple terms then this is one of the best sources and is free of cost.  These letters are available on the Berskshire website and tabulated so you can search for them by the year they were published.

Inspite of these letters being written so well, I was a novice and was not able to relate to a lot of concepts with respect to the Indian companies, because American companies have different kinds of share holding patterns.

Accidentally I happened to chance upon the Wealth Creation studies created by Raamdeo Aggarwal Jt. Managing Director of Motilal Oswal.  These were similar to the Berkshire Hathway reports in that they came out each year but were better because they were talking about Indian companies and the Indian stock markets.  And to top it, they were also free.

I devoured on these reports and now am a big fan of Mr. Raamdeo Aggarwal who authors these reports.  Recently they have released the 23rd wealth creation study.

Most channels also get Mr. Aggarwal to discuss on the stock markets on a regular basis.  On YouTube you will see episodes of ETNow or CNBC TV18 where he is featured on a regular basis.  However last year the channel Bloomberg Quint ran a 4 part series with him on investing.  This is the best 4 hours you can spend on learning investing from one of the stalwarts of investing.

There is another person whom I admire from seeing his interviews on television.  he is Riddham Desai of Morgan Stanley India.  You can also see his interviews on either ETNow and CNBC TV18 or on Bloomberg Quint.

Between Riddham and Raamdeo the difference is the fact that one can distill the macro perspectives of the Indian economy so simply and present while the other can focus so well on the micros amazingly.

Have a look at these reports and videos and you will get a great input on how to evaluate stocks.

However stock picking is a tough call and if you don’t want to put in the hard work, then Mutual Funds and ETFs are the best route for you to take.

Till next time….