Confounding Compounding
Hello people!
How are you?
Happy Navratri to everyone☺️
In the 4th chapter "Confounding Compounding", the author Morgan Housel explains the profound impact of compounding, often referred to as the "eighth wonder of the world".
The author states,
"You don't need tremendous force to create tremendous results. If something compounds- if a little growth serves as the fuel for future growth- a small starting base can lead to results so extraordinary they seem to defy logic."
You've heard of Warren Buffet?
One of the world's wealthiest individuals- created about 99% of his wealth after his 50th birthday. As I'm writing this blog, his net worth is $117 B according to Forbes magazine. The real key to his fortune is not just being a phenomenal investor, but also being a phenomenal investor for over six to seven decades.
His skill is investing, but his secret is time.
That's how compounding works.
Let's take an example:
Consider Investor A, at age 25, invests ₹100,000 with an annual return of 8% and continues to invest ₹100,000 annually and Investor B does the same but starts investing at age 35.
By age 50, the investments of Investor A had grown to approximately ₹2,847,373 and that of Investor B would be ₹1,741,697.
Even after learning the facts of compunding, only few of us tend to take action towards it. Because we don't intuitively believe it.
This is one of my favourite examples from this chapter to explain the psychology behind not investing early:
Linear thinking is so much more intuitive than exponential thinking. If I ask you to callculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds(it's 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it's 13,42,17,728).
Good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That's when compounding runs wild.
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In case, you missed reading the first chapter- No One's Crazy, the second chapter- Luck & Risk and the third chapter- Never Enough
I hope you learnt something through reading this blog. If Yes, then make sure to like the blog, comment, share and subscribe to the email newsletter if you haven't yet. I post a blog every Monday at 7 pm IST, until then Happy Reading!
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