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

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All I want is doubling

Posted by Muthu on December 3, 2013

After a long time, just for a change, I’ve written three pieces in 3 days. This is a black swan event:-) 

Going forward, as always, I would try to maintain a frequency of 2 posts or bare minimum one a month. 

I heard some one saying the other day that all he looks for in a stock is two bagger. Two bagger means two times the invested capital. He is ‘contended’ if a stock he owns doubles in a year.

I was talking to a good friend today. When I mentioned about a fund delivering over 22% annualized returns (53 times multiplying of capital) in the 20 year period; he was not impressed. He felt that the returns are relatively lower than what real estate is capable of giving.

I would like to address the above 2 comments:

The first gentleman ‘only’ wants his investment becoming a two bagger in a year. Let us assume he invest Rs.10 lakhs today. He wants it to be Rs.20 lakhs in a year down the line. Assuming he finds ten such opportunities in the next 10 years sequentially, he would be worth more than Rs.100 crores. Extrapolating further, he would have Rs.100,000 crores (Rs.1 lakh crore or Rs.1 trillion) in 20 years.

Reading one lakh crore, we want to laugh at some one’s foolishness. Since financial literacy, especially knowledge of compounding is very low; we talk two bagger, three bagger or ten bagger very lightly. If a sizeable sum is invested, one or two multi baggers are good enough for the entire life time.

For those of you who are wondering how Rs.10 lakhs can become 100 crores or 100,000 crores, I’ve given a simple working with Rs.1

As the money doubles every year:

After 1 year Rs.1 becomes Rs.2

After 2 years- Rs.4

After 3 years- Rs.8

After 4 years- Rs.16

After 5 years-Rs.32

After 6 years- Rs.64

After 7 years-Rs.128

After 8 years-Rs.256

After 9 years-Rs.512

After 10 years- Rs.1024

After 11 years- Rs.2048

After 12 years-Rs.4096

After 13 years-Rs.8192

After 14 years- Rs.16384

After 15 years- Rs.32768

After 16 years- Rs.65536

After 17 years- Rs.1,31,072

After 18 years-Rs.2,62,144

After 19 years- Rs.5,24,288

After 20 years- Rs.10,48,576

This is how money multiply by 10 lakh times (you read it right:-)) in 20 years.

Having addressed the first gentleman let us look at the second one.

Assume he invests Rs.10 lakh today in a fund which is capable of giving a similar 22% returns over long time. Let us assume he has another 40 years to go before retirement. His Rs.10 lakhs would become Rs.280+ crores by the time he retires.

If you want to know the value of Rs.280 crore today (@6% inflation), it is Rs.27 crores. 27 crores out of 10 Lakhs?!

22% over a 40 year period is impossible to get.

How I say that?

I know a gentleman who is generating ‘only’ an annualized return of 19.7% for last 47 years.

He became the richest man in the world.

His name is Warren Buffett.

6 Responses to “All I want is doubling”

  1. Shankarraju said

    Hi Muthu, I like the last puch line 🙂 But wondering why I can’t invest in two best schemes for 20 years. Then didn’t I get a single chance of getting 20% annualized return (As we have lot of MF schemes giving 2 digit return over 10 years)?

    Thanks and Regards,
    SHankar

    • Muthu said

      It’s not the question of how many funds in which one invests. As the base gets bigger, the returns are likely to become smaller. However I do see a possibility of good returns in the Indian stock market in the next one decade or so.

  2. Vijayan said

    Muthu sir……You know our Nifty gives 17% annualized return……Our many MFs are beat our index…Then isn’t possible to get more than 17%…..Plz explain………….

    Thanks
    By,
    R.Vijayan

    • Muthu said

      As I’ve explained in the past, I do foresee a good growth rate for the country and the stock market in the next one decade or so. However at some point, due to higher base, the returns would start slowing down. We need to remember that even some one like Buffett can generate ‘only’ 19% over very long term.

  3. Swapnil said

    Thank you Muthu Sir for your insights on “Doubling the money”. Warren Buffet generated 19% over 47 years (and that is phenomenal).However, this he did when he had tons of money and to get that return on that kind of money is great. We should compare Warren Buffet’s result when he was not as big investor as he is today and he averaged around 50% per annum in those years.

    Buffett Results:

    1950-1956: 43.0% annualized
    1957-1964: 27.7% annualized
    1965-1993: 29.1% annualized

    Joel Greenblatt runs a firm called Gotham Capital. Gotham started as a hedge fund in 1985, where Greenblatt built one of the best 10 year track records that I am aware of: compounding his capital at 50% per year from 1985-1994. At the end of that period Greenblatt returned all of his partners’ capital. He continued investing the same way he did previously, but only with his own money. Although I haven’t seen any documented results after 1994, many people close to Greenblatt say that he averaged in the neighborhood of 30% per year after 1994. I’ve read that he averaged around 40% annually from 1985-2005 (I think some people just took the 50% from the first 10 years and averaged it with the 30% from the second 10 years).

    Mohnish Pabrai started Pabrai funds and also delivered exceptional results

    Pabrai Results:

    1995-1999: 43.4% annualized
    1999-2007: 37.2% annualized (he started Pabrai Funds in 1999 and this is before his fees)
    2007-2009: -41.7% annualized
    2009-2013: 32.7% annualized

    The point I want to make is that it is not impossible (but still extremely difficult) to generate 40-50 % per annum returns on small amounts of money.

    Apologies if I am sounding rude.

    • Muthu said

      Thanks for your thoughtful and detailed comment. I remember even Buffett saying once that he can generate enormous return if his capital base is low.

      The idea of writing this piece was to ensure that people don’t get carried away by tall promises and tone down expectations.

      I appreciate your view point and it is valid.

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