If you ask around, what’s the eighth wonder of the world? you’ll get all kinds of answers. I think only investors/financial advisers will refer to Compounding 🙂 …that too very few of them. Even though I have been in investment business since last 15 years, I never understood or cared about the importance of it. Only since last few years, I’m beginning to understand how powerful the concept is.
Yes, Einstein called “Compound Interest” the Eighth Wonder of the World, he added further “He who understands it, earns it..he who doesn’t..pays it.” The Snowball Effect means the same thing and makes it easier to understand, here is a post that explains it beautifully in simple language..not recommending the stocks mentioned here but idea is to get familiar with the concept.
Above is the compound interest formula, of course the rate of return matters but the “time” is even more powerful factor in real life examples. Mohnish Pabrai is one of my favorite teachers and he has this excellent video on Compounding with familiar/peppy music 🙂 . It moves fast (at least for me) but take your time, watch it repeatedly as other related concepts are also mentioned in this.
As you can see, the compounding works wonders if started at young age (longer time we have). But the irony is that most of us are least bothered or we’re interested in quick riches when younger. Only in later years, we realize (if at all) that “Get Rich Quick” schemes/ideas don’t work in Investing and show our willingness to give longer time frames for building wealth.
This post is not only about money/finance, compounding is equally effective in other areas of life as well..whatever your interest/passions may be..e.g. for building knowledge/relationships. I didn’t know anything about finance when I was young but I was curious, loved reading, liked learning about other cultures/countries and took tremendous risk while going to Australia for college at age of 17.. when hardly anybody went there for undergrad. There was so much to learn and I did..experimenting with new things, taking calculated risks. And I kept building upon it, in the Corporate World and in Investing. I’m sure all of you can relate to it in one way or another i.e. how you improved upon certain aspects in life, formed new good habits over the years and they continue to pay off till this day.
Let me take Compounding even further i.e. its affect in spiritual life. Our money, relationships won’t go with us but spiritual credits will and again best is to get started early. Many think of taking up spiritual life in older/retirement years but it is not a great idea. It is not going to happen unless we start now, spiritual practices/mediation should be taken up when we’re youthful and have vigor. What service can one perform when pangs of old age and disease overtake our minds/bodies? Look around, see your parents..grandparents. Prahlad maharaj’s teachings from Srimad Bhagavatam starting with 7.6.1 (7th Canto, 6th Chapter, 1st verse) emphasize on this aspect:
kaumāra ācaret prājño
dharmān bhāgavatān iha
durlabhaṁ mānuṣaṁ janma
tad apy adhruvam arthadam
The meaning is “One who is intelligent should use the human form of body from the tender age of childhood — to practice the activities of devotional service. The human body is most rarely achieved, and although temporary like other bodies, it is meaningful because in human life one can perform devotional service.”
I’m sure other scriptures/religions also say something to this effect. I can share from my experience that the practice of meditation I started 15 years ago..earlier I couldn’t sit/concentrate for more than 5 mins but it certainly gets better with time and deliberate practice.
So Compounding works whether in gaining material or spiritual riches. We can’t change the past but can definitely put in efforts for our future and guide the next generation; for that “Best time to act is Now!!
Hi Vikas!
Loved your Post. Truly Compounding is a wonderful concept and no doubt it is called “The 8th wonder of the world”.
I always had trouble with the compound interest formula but I eventually figured it out.
I understood the formula of Compound Interest on 31st December 2016. I will never forget that day. That was a Eureka moment for me. It felt like I have found a new secret.