Effect of Compounding

Compounding is the fact that money grows faster purely because more time has elapsed since it started to grow.

ChessboardLet me start with an anecdote close to my heart: Chess is a board game played on 64 squares. In an ancient epic, an arrogant king was humbled by the mathematical agility of the inventor of Chess. The king asked the inventor for any reward.

To teach the king a lesson, the inventor asked – put one grain of rice on first square (1), double that on the second square (2), double that on third square (4)… and so on and so forth. And when you reach 64 square, just collect all these rice grains and give it to me (1+2+4+8+…. till 64th square).

The king laughed thinking that the inventor is foolish asking for a ‘few’ grains of rice BUT soon realized what compounding is.

Box 11 on the chess boardThe total number of grains equals 18,446,744,073,709,551,615, weighing 461,168 million metric tons – which is 50,000 times more rice than produced in United States every year, and if put together would be a heap of rice larger than Mount Everest. (Picture on the left shows the heap on square 10, this bunch becomes larger than Mount Event till square 64.)

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Investing in Commodities

A friend of mine asked me today “Should I invest in Gold“? We had a long conversation and I think the following parts of the discussion will be useful to the readers:

My view: Gold will not make money over the long term. I always say ‘People with a long term view should buy S&P 500 and forget about it’. I cannot say the same about Gold. In my opinion, Gold will never deliver above average market returns.

The immediate question I am often asked is – then why do people invest in Gold? The main reason is ‘People are hedging their bets’. They believe Gold prices rise when stock prices fall.

Let us expand our discussion to talk about Commodities (Gold is a commodity. Other examples of commodities include Coffee, Copper, Silver, Aluminum).

The conceptual difference between Corporations and Commodities – if you own shares of Microsoft, you own Continue reading