Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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A small story on compounding

Posted by Muthu on January 27, 2011

I wrote two articles for posting during the week and for some reasons decided not to go ahead with the same.

I read a lot. I’m able to write only because I read. Some time I get an idea while reading some thing. The idea may not be original but the posting is. Wherever I reproduce the content partly or fully, the source is duly acknowledged.

I shared with one of our client recently a short story I read in a promotional material of Sundaram mutual fund. He liked it and said that people would be able to connect to this story.

So I’m sharing the same below.

There was once a poet who fell upon such hard times that he was no longer able to feed his family.

Hearing the king greatly encouraged talent and was famed for his generosity, the poet set off for the royal palace.

When brought before the kind, he bowed low and asked that he may recite a poem.

On hearing his recitation, the king, well pleased, asked him to name his reward.

Pointing to a finely wrought chess board, the poet said “Your highness, if you place just one grain of rice on the first square of this chess board, and double it for every square, I will consider myself well rewarded.”

“Are you sure?” asked the king, greatly surprised. “Just grains of rice, not gold?”

“Yes your highness” affirmed the humble poet.

“So it shall be” ordered the king and his courtiers started placing the grain on the chess board.

One grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on.

By the time they came to the 10th square they had to place 512 gains of rice.

The number swelled to 5,24,288 grains on the 20th square.

When they came to halfway mark, the 32’nd square, the grain count was 214,74,93,648 – that is over 214 crores.

Soon the count increased to lakhs of crores and eventually the hapless king had to hand over his entire kingdom to the clever poet.

And it all began with just one grain of rice.

Never underestimate the power of compounding. If you stay invested long enough, it’ll work for you.

A small sum invested every month from the beginning of your work-life can lead to a very impressive sum at the time of your retirement.

Even if you read about Buffett, despite his remarkable investment prowess, it took time for the snow ball to start gaining momentum.

Time is the essence for the 8th wonder, compounding to work.

In equities, time levels the bouts of under and over performance and produce optimum returns.

Equities are predictable only over long term and short term performance or forecasts are of little use.

Hope we remember it, especially when the going is tough.

I end with a quote from Buffett:

If I buy a farm, I don’t know whether there’s going to be drought next year, but I know that there are not going to be 20 straight years of drought, and I know there’s not going to be 20 straight years of great rainfall.

One Response to “A small story on compounding”

  1. NARESH SHARMA said

    Can it be explained by some mathematical formula – it can be understod easily then. Thanks!

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