Einstein said the 8th wonder of the world is compounding.
I remember discussing the basics of compounding with a co-worker while working at a part time job while still in college. He explained to me about how if I put away money at that time. It would grow to a substantial sum even if invested at a small rate of return. I thought to myself “You are probably right” however, I had neither the excess money, knowledge, or desire to figure out how to start that compounding engine. Today I regret dismissing those thoughts. Compounding is a really interesting concept. Essentially it means repeatedly doubling a number. I don’t think many people really understand how powerful and explosive compounding can be.
There is a story about the origin of the game chess in India. A man invents the game of chess and takes it to the emperor. The emperor loves the game and quickly becomes addicted. He says to the inventor I want to own this game “name your price”. The inventor says “OK, I want you to put 1 grain of rice on the first square, two grains of rice on the second square, four grains of rice on the third square, and double it for each successive square. The emperor quickly says “that is all you want!?” and tells his treasurer to pay the man. A few weeks pass and the inventor comes to the emperor and says I still have not been paid. The emperor consults with his treasurer and the treasurer informs the emperor that they began to add it up and it turns out there is not enough rice in the emperors storehouse. In fact, there is not enough rice in the whole kingdom. There are 64 squares on a chess board. If you start with 1 grain of rice and double it 64 times it equals 9,223,372,036,854,780,000 or if you are like me and that number just is to long to really know what it means it is nine quintillion, two hundred and twenty three quadrillion, three hundred and seventy two trillion, thirty six billion, eight hundred and fifty four million, seven hundred and eighty thousand.
For the past year I have been learning and digesting all the information I can surrounding investing. I need to put my compounding engine to work. There are 3 ways to grow the compounding engine.
1) the amount of money you start with.
2) the rate of return.
3) the length of time invested.
Now, as we saw from the example of the rice on the chess board even small sums can grow to absurd numbers. It all depends on what your rate of return is and how long you have to get there. I’ll discuss those concepts in future posts.