Meeting financial goals with Hemchandra – Fibonacci series


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… 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.

Till the next time.

Carpe Diem!!!

The Star Principle & the Coffee Can Portfolio -looking at the same picture from different angles

Financial Independence, Uncategorized

I was re-reading the book – The Start Principle: How it can make you rich by Richard Koch.  If you have been following my posts you will know that I am quite a fan of his writings and have almost all the books that he has written.  Each time I re-read them, I identify something which I had not noticed earlier.

For all those of you who haven’t heard of Richard Koch, he was the first one to write a book on the 80/20 principle, also known as the Pareto principle.  He has written a lot of books related to the application of the 80/20 rule but in addition to that his basic slant has always been on strategy and has a lot of wonderful books written with strategy as the back drop.

If you want to read an author who simplifies strategy, not only for corporates but in real life, then he is one author you should read.

This time while I was reading the Star Principle once again, one aspect which leaped out of the book was that the Star Principle is so very similar to the Coffee Can portfolio which is covered by Saurabh Maukherjea in his book – Coffee Can Investing.

As per Richard if you invest in a company which is a leader in the market place and the market itself is growing at more than 10% compounded, then you will make money hand-over-fist if you can see that the market itself has longevity.  His logic is- if you invest in such a company in its early stages, then the possibility of making massive returns is even higher.  These companies are very few and far between and hence are STARS.

The concept of Stars, Cash Cows, Dogs and Question Marks was first propagated by the consulting company BCG (Boston Consulting Group) where Richard had his first job.

The concept of the Coffee Can portfolio was first espoused by Robert Kirby in 1984.   It was serendipity because Kirby had recommended a certain portfolio to a friend’s husband who did not sell any shares in the portfolio over a period of 10 years while Kirby did.  The amount of wealth that the portfolio created was way higher than what Kirby created in his portfolio.  This is the central concept of compounding which I keep harping about in each of my posts.  If you let something compound over long periods the amount created is enormous.

Saurabh takes the concept further and shows us examples with research, done over multiple blocks of 10 year periods, on companies which grew every year at a minimum of 15%.  If you had bought shares in those companies and then forgotten all about them for the next 10 years you would have got a very large return on your investment.  The number of such companies would be quite small.  If you extend the research to 15 year periods then the number of companies which had such consistent growth would be even smaller, but the certainty of returns would be much higher.

At the end of the day if there are only a few companies which can grow consistently year on year over such long periods of time then thats only possible if they are market leaders in the niche they occupy.  They also cannot continue to keep growing over long periods of time at such high rates, if the market itself is not growing fast enough.  Which then end up being STARS by the definition given by Richard.

The one difference which I perceive is that the Coffee Can portfolio does take into account the fact that some of the companies may close down  or lose market leadership by emphasising that you need to have a “portfolio of companies” with these characteristics.

So its not only about compounding but about creating a sensibly constructed portfolio of STARS which can create enormous wealth.

Wealth generation is not complex if you follow some simple rules….its not easy either though.

Till next time.

Carpe Diem

Compounding & successful organisations

Financial Independence, Uncategorized

Recently Tim Ferris had a podcast with Jill Collins.  If you have not heard of Jim Collins, he is the author of a lot of books which study how businesses succeed and fail.  One of his most famous books is Good to Great.  If you have not read it then its a must read for anyone who is even remotely interested in the corporate world.

If you haven’t heard of Tim Ferris or read any of his books the I highly recommend that you read his book The four hour work week and others.  The advantage of the podcasts is that you get to hear real life people and Tim goes into the interviews with a very detailed structure so that you can get maximum benefit

Coming back to the podcast with Jim Collins(if interested you can listen to the podcast  here). It’s a fabulous talk spread over about 2 hours but covers a very wide range of topics from “writing’ to Peter Drucker and to the Flywheel concept.  Jim had first introduced this concept in the book Good to Great.  But there it was more a chapter on how successful companies built systems to ensure each step helped them grow to the next and kept feeding.

However this flywheel concept was not elaborated further for a long time.  In the podcast Jim spoke about how he’s done more research on the Flywheel concept and written a monograph.  For me a monograph was a new concept. It’s a detailed study of a given topic. It’s less than a book but more than a whitepaper.

Since I was very interested in the flywheel concept from the time I had read the book, I immediately bought to read.  The big concept which stands out int he flywheel is the positive feedback loop.

Most of you would know of the negative feedback loop.  It helps control a process near a defined setpoint.  For example if you put car in cruise control, then if due to a gradient the speed starts going up then automatically the pressure on the acceleration pedal is reduced.  Another example of a negative feedback in your everyday life is the temperature control in the water heaters.  If the temperature reaches the set-point then the heating is stopped.  Negative feedback loops ensure control.

Positive feedback on the other hand is compounding at its core.  One good thing leads to another and another.  So Jim Collins gives multiple examples of companies like Amazon, Intel, Vanguard have used positive feedback to grow exponentially over a consistent period of time.

Which brings me to another book which looks at this same concept from a different angle.  Its a book by Perry Marshall called 80/20 Sales and Marketing.  Perry was influenced by Richard Koch who wrote the famous book on 80/20 many many years back.  Perry has taken the concept of 80/20 and explained the fractal nature of this law.  If you are in anyway related to sales or marketing you will find enormous nuggets for helping you in your sales or marketing career.

When I read “Turning the Flywheel” it reminded me of a similar concept in nature which Perry shows on how the Grand Canyon was formed and how the same positive feedback loops can be used to dominate Google Adwords.

More and more as I come across successes I am convinced of the fact that positive feedback (or compounding) changes everything in nature, businesses and financial life of people.

Would love to hear from you’ll if you’ll have seen any place else the impact of positive feedbacks.

Till next time.

Carpe Diem!!!

grand canyon during sunset

Photo by David Ilécio on

Books that have helped me with my financial education- Part 3

Financial Independence, Uncategorized

Its been almost 2 months since my last post.  During this time I went on vacation with my family.  I will list those exploits in a separate post.

Before I left for my vacation, I was writing a series of posts on the books that have influenced me.  Hope after reading the blog posts you got a chance to read those books.  I would love to hear your comments on how you found the books.

For the moment this will be my last post on the books I have read till I get to my next lot.

The first book this time is the STAR Principle by Richard Koch.  I have been a fan of Richard Koch for a long time and try to read through all his books. In the STAR principle Richard talks about identifying companies which have higher than 10% growth rates and how they can end up creating almost monopolistic situations.  For developed economies like the US and UK I think this logic of identifying at 10% growth rates is a good number because the overall economy is growing at just about 2% average.

However if we were to look at it from the Indian context where India is growing at about 13-14% (6-7% growth + 7% inflation) then the number in his logic dosen’t hold.  However rest of the logic that he espouses in the book should hold.  I have myself not been able to identify an Indian company which is growing at 5 times the overall economy( 10% when economy is growing at 2%) on a consistent basis in the public domain.

The next book I read and would recommend Finding the Next Starbucks by Michael Moe.  Like the above book by Richard Koch, this one is also more focused on identifying high growth companies before the world comes to know about them.  Again since I don’t have knowledge of the private investment space in India, I have not been able to verify the logic and rules that the author gives.  However its a good read and a different way of identifying high growth companies.

I have been a big fan of the Little Book series.  In one of my earlier posts I wrote about the The Little Book That Beats the market by Joel Greenblatt.  There are a whole lot of other Little Books by different authors which explain difficult concepts of the financial markets in easy to read language.

One book which is worth a mention once again is Common Stocks Uncommon Profits by Phil Fisher.  This is a little serious read but is a timeless classic on equity investing.  Even Warren Buffet recommends Phil Fisher.

accounting administration books business

Photo by Pixabay on

While exploring investing, I did a lot of research on people who do trading – stocks, commodities etc. One author who I found has done a lot of work on understanding traders and writing about them is Micheal Covel.  I was introduced to him via the Little Book on Trading.  I then went on to read a couple of other books Trend Following and Turtle Traders.

If you have seen the movie Trading Places then you will find the Turtle Trader especially fascinating.  I did use the rules of the turtle traders for a short while and found them very valid for the Indian market as well.

However I left the trading space because I realised I did not have the speed with which to give directions to my broker to release positions when the trend reverses.  There are a lot of platforms available which allow you to set the rules for trading where based on your rules the platform can sell your holding.  Since I was only experimenting, I did not subscribe to any of these platforms.

In my next post I will share with you some other classic interviews and reports which explain the concepts of investing and financial planning.

Till then ….let me know your comments

Carpe Diem!!!