If my publisher put a gun on my head and said your book has to have a one word title, you know what it could be? It has to be “Compounding”. If I were allowed 2 words it would be “start early”. If I were allowed 3 words it would be “Get wealthy, slowly”.

I have made my life talking,  acting, writing, about compounding. Every article of mine will take you to compounding in some form. I would be very happy if you can get your children and grand children to read this. I am sure even a class 7 student can understand this series that I am planning to write. Just 3 or 4 blogs of 500 words each. Maybe less.

If you are a student about 14 years of age it is good time to think of compounding. Compounding is the only thing that can create wealth for you in the long run.

Let me take a very simple example. If you eat a mango and throw away the seed, the seed is gone. Gone to waste. We all know that one mango has one seed. You have no clue how many mangoes are there in one seed. That is the power of compounding.

How long will you get mangoes?

As long as you protect the tree, water it and make sure that it is not eaten away by insects. That is all.

How does compounding work? or rather what is the first step in understanding compounding?

Know the formula.

Amount at the end of the period = Invested amount (1+r) ^n

clearly YOU as the investor you can control the amount invested, and you can control the number of years you allow it to compound. So that means you can control when you start the compounding. Later on you have to protect the tree (which means you should not interrupt the compounding) and let the tree give you its fruits.

So the first step for a student is to STUDY WELL. Or learn an art well (painting, photography, sport, management,…whatever) and EARN WELL.

So for a Sachin, Deepika, Ranbir, Kohli….the first step is to MASTER the art.

Mastering and Enjoying the art allows them to pursue the talent. Pursuing the art lets them earn money.

So earn well.

Spend sensibly. You need to spend sensibly and SAVE AGGRESSIVELY.

The saved money has to be INVESTED. Only when the money gets invested sensibly in assets which will give variable returns. Remember it is the variability which makes the LONG TERM return rates attractive for investors. If there was no fluctuation, it would give poor to flat returns.

The problem is, once you graduate to the “big leagues” of stock investing, you start setting your sights a little higher.  3.5% interest isn’t good enough anymore.  You begin to want bigger returns. Ha greed steps in. Good. That is the way the money will grow.

During booming stock market years, it seems like MEGA returns of 27% (happened in 2017) are possible. Then 2018 happens and you get 4% return, and eventually, those ridiculous notions of out performance and exaggerated returns are going to come crashing down when the next recession appears.  Realistically though, the long term return of the Sensex averages hovers around 13%.  For the math-reader, this means your money doubles every 6 years (ok that means 12%, I am assuming 1% expenses). This is still way ahead of the 8% p.a. you will get in PPF or even a bank deposit.

That is of course slow and it is frustrating for people who chase alpha and want to double their money in 3 years. Ha, that is the catch. After all we all want it fast, do we not? So some investors experiment with some asset classes where they THINK they will get better returns. Like Futures and Options, day-trading etc. If you are too dumb (like me) and do not know, understand or attempt these things, great, good luck to us! They might invest in the last year’s winner or some rockstar fund – and the result is normally egg all over your face – or in this case portfolio!