Tuesday, October 31, 2006

The power of compounding

From an article from Rediff: Power of compounding

Albert Einstein called compounding the eighth wonder of the world.

A king lost a well-fought game of chess to an ordinary farmer. The king asked the farmer to choose his reward and all that the farmer asked for was one grain of wheat for the first square of the chess board, two grains for the second square, four grains for the third, eight for the fourth and so on and so forth for all the 64 squares. The king was very happy for being let off rather lightly and readily granted the wish. The real snag came when he tried to settle the claim.

He required 18,446,744,073,709,551,615 grains of wheat!

Now isn't that mind-boggling? Let me try to be more concrete. There are about 25,000 grains in 1 kg of wheat. The king required about 737,870 million tonnes of wheat to fulfill his obligation. Now, here are some statistics for comparison. Our total national agricultural produce (wheat, rice, sugarcane, cotton, etc.) in the year 2004 was around 200 million tonnes.

The required quantity of wheat is about 3,690 times this amount. Even all the wheat produced by man from all over the world, ever since he learnt the art of cultivation will be far less than this quantity! If the king had decided to settle this liability in cash, say, at a super wholesale rate of Rs 3.50 per kg, he would be required to pay Rs 25,82,54,417 crore. This is over 2,000 times the Indian Gross National Product (GNP), which is the total value of all industrial as well as agricultural goods and services produced by India.

This article discusses the financial diligence that is required by every investor to have a good life. I would definitely say Worth a read and also follow the principles mentioned in the article.

Read the article

Source : Rediff


Publia said...

The only issue being how much is 1 lakh of rupees in a currency that I understand. Yes, I know, I will try google.

Balaji said...

@publia >> :)

Well you can take $1 = Rs 45. But the point of the example and the article was not to dream of riches being built. But rather to develop the nature to invest and invest regularly so that you can reap at a later time when you really need it most. I reckon that is a habit that needs to be cultivated because many including myself think mainly of short term only and that does not help.