Before starting with the blog I’d like to give some context. I was reading The Psychology of Money by Morgan Housel (which is a very impressive book) and I came across a wild examples just 50 pages in the book. Actually I was travelling to Jaipur from Mumbai and was working on Segmentize’s UI while sitting on the window seat of the train. I must say it was quite hell of an experience. I bought the book from the Mumbai Central Railway Station and one last bold statement before we get into the example. Bookstore owners are the kindest people alive. On that note lets dive right into it
This examples comes from the 4th chapter which elaborates the power of compounding. Warren Buffet’s example was one of them and I was so amazed by it that I decided to write a blog on it instantly while I sit in the train just 1 hour before my destination. I’d explain it in my own words. More than 2000 books have been written on Warren Buffet extraordinary wealth which in the book is roughly $85 billion (ofc now it must have changed). The author argues that none of these books stresses enough on the fact that Buffet’s immense wealth is not only a result of his investing skills but more of the fact that he has been investing actively since the age of 10. His annual rate of return of his investments is around 22% yearly. Remember the number 22%. Now, if he would have started investing in his 30 with a reasonable $25000 and retired in his 60 (with his 22% annual return). He would’ve been worth a merely $11.9 million dollars. 99.9% less than his current net worth. Now, Buffet is not the one with the most phenomenal Annual rate of return. Jim Simons, head of hedge fund Renaissance Technology has a Annual Rate of Return of 66% since 1988. No one is close to this number. This thrice than that of Buffet’s. However, Simon started investing in actively not until he was already 50 years old. Simon, as of book, is worth $21 billion, 1/4 of Buffet and a difference of $64 billion. Though, he had only less than half years as compared to Buffet. Now, the fun begins. Imagine what Jim Simon would be worth if he had 70 years just as Buffet and with his Annual Rate of Return of 66%? Please hold your breath. Sixty three quintillion nine hundred quadrillion seven hundred eighty one trillion seven hundred eighty billion seven hundred forty eight million one hundred sixty thousand dollars. Damn!!! These are ridiculous and impractical numbers what this shows the power of compounding. Just for you information, the world economy is world $80 trillion dollars. Can you imagine? Just compare the two numbers. I’ll give you a minute to process it. This particular chapter of the book contains 2 more examples including one explaining how ice age began (I know its amazing that how a finance book gives these examples) and other one is about the increase of computer storage from 1970 to 2011. Alright, I guess this is enough for today.
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