I am writing this series of letters on the art of investing, addressed to a young investor, aiming to provide timeless wisdom and practical advice that helped me when I was starting out. My idea is to help young investors navigate the complexities of the financial world, avoid misinformation, and harness the power of compounding by starting early with the right ideas and steps. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.
Dear Young Investor,
I hope you are doing well and are eager to learn more about the financial path ahead of you.
In today’s letter, I want to share an idea that, if you grasp and embrace well, can change your financial destiny in ways you may not have even dreamed of.
It is a force so subtle, yet so powerful, that it is frequently overlooked until its repercussions grow too big to be disregarded. But before I tell you about that, let me tell you a story.
This is the story of a boy who, at age 10, read a book titled ‘One Thousand Ways to Make $1,000’ that started with the ‘story of money’. It told him how to make his first $1000, and then if he grew it 10% a year, it would magically turn $1600 in 5 years, $2600 in 10, and $10800 in 25 years.
The way these numbers exploded as they grew at a constant rate over time was how a small sum could turn into a fortune. The boy could picture the numbers compounding as vividly as a snowball grew when he rolled it down a hill.
Well, that was Warren Buffett’s introduction to the ‘power of compounding’, which was about to change his life forever. Buffett quickly announced to a friend that he would be a millionaire by age thirty-five. He reached that target at age thirty, one billion dollars at fifty-six, and then the curve shot up.
If you think Buffett’s is a one-off case of such ‘magical’ growth in wealth over decades, you must know this. He did nothing more than letting the power of compounding work on his money, without interrupting it at all. This power is available to each of us, only if we understand well how it works, and then give it adequate time to show its magic.
You may have heard about ‘compounding’ earlier, either from a well-meaning relative or in a classroom. However, I want you to put any assumptions you may have aside. Rather than treating this concept as a dry financial one, let us study it together as a basic force of nature that, given the chance, can transform your life.
Imagine, if you will, a vast forest. Not just any forest, but a very old one with trees that are hundreds of years old. Even though you could spend a day in this forest and marvel at its majesty, you would not be able to see it grow. The changes would be so subtle that you could camp there for a week and still not see them.
But what if you could spend decades or perhaps a century observing this forest? You would witness saplings breaking through the ground, extending upwards, and ultimately dominating their surroundings. You would see the gradual development of a rich, vibrant ecosystem as well as the slow, uncontrollable growth of roots and branches.
This is compounding, my young friend, at its most basic level. It is a slow process of growth that, in due course, produces such remarkable outcomes that almost seem miraculous and supernatural.
When it comes to our topic of study, which is investing, your money can grow much like this forest. Every interest or return you earn is like a new branch or leaf that adds to your wealth and creates new opportunities for growth. And just like in nature, the most striking outcomes arise from patiently accumulating over time rather than from quick, spectacular growth.
The Deceptive Nature of Exponential Growth
Now, here is where things get interesting, and where many people, young and old alike, often make mistakes. Though compounding is exponential, our minds are programmed to think linearly. It is the difference between climbing a gentle slope and conquering a mountain that becomes harder with each step.
Let me give you an example that might surprise you. Imagine you have a choice between two options –
- Receive ₹10,000 a day for 30 days.
- Receive ₹1 on day one, but double it every day for 30 days.
Which would you choose?
If you are like most people, the ₹10,000 a day sounds incredibly tempting. After all, that is ₹3,00,000 in a month! But let us look at what happens with the ₹1 –
- Day 1: ₹1
- Day 10: ₹512
- Day 20: ₹5,24,288
- Day 30: ₹53,68,70,912 (₹53 crore)
That is right – by day 30, that single rupee has grown to over ₹53 crore, all through the power of compounding.
Now, I am not saying you will find daily double-digit returns on your investments. However, this example highlights an important point. It is that compounding can produce outcomes that appear to defy logic. This is the reason behind Albert Einstein’s reported description of compound interest as the “eighth wonder of the world.”
You might be thinking, “That is all well and good, but how does this apply to me, right now?”
It is a fair question, and it points us in the right direction — the earlier you begin, the longer compound interest has to work its magic.
Consider these two investors –
- Sita, who starts investing ₹2,000 a month at age 25
- Gita, who starts investing ₹4,000 a month at age 35
Who do you think will end up with more money, assuming they both earn an average 12% annual return and continue until they are 65 years old?
- Sita: ₹2,37,64,840 (₹2.3 crore)
- Gita: ₹1,41,19,655 (₹1.4 crore)
Gita ends up with less money than Sita, even though she invests twice as much each month. Why? Because Sita allowed compounding to do its magic for an extra ten years. Those early years make a tremendous difference in the long run.
This is not about making flashy investments or getting rich quickly. It is about realising that time is your most powerful partner in the wealth-building process. The secret is to start small, be consistent, and let compounding handle the heavy lifting.
The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life.
This is a masterpiece.
– Morgan Housel, Author, The Psychology of Money
The Quiet Discipline of the Long Game
Anyway, this is where things get tough, and the reason why so few individuals actually take advantage of compounding’s full potential despite its power.
It requires patience. A lot of patience.
Waiting years and decades to witness the full effects of our financial actions can seem almost old-fashioned in a world where we can order food with a tap of our phones and binge-watch entire TV series in a weekend.
However, this is the foundation of actual riches. Not in the flashy day-trading or the quick-rich schemes but in the steady, quiet commitment to a long-term strategy.
It is like planting a tree. You plant it for the generations, not for the shade it will provide next year. Likewise, investing with compounding considers more than simply the coming year or even the following ten years. You are building the foundation for a secure financial future that will hopefully support you for the rest of your life and even help future generations.
The Compounding Mindset
American entrepreneur and investor Naval Ravikant said –
All returns in life, whether in wealth, relationships, or knowledge, come from compound interest.
It is important to understand that compounding is about more than just money. It is a mindset that you may use for many aspects of your life. It is about understanding that consistent, small efforts over an extended period of time can yield amazing results.
The compounding mindset will show up in your work life as ongoing education and skill improvement. Your knowledge and worth will grow steadily over time as a result of every article you read, course you take, and new skill you acquire.
This mindset shall also work wonders for your relationships. Remember that deep, meaningful friendships are fostered via small acts of kindness, continuous support, and regular communication, which accumulate over time. Even while a quick daily check-in with a friend or loved one may not seem like much, over time it creates an unbreakable foundation of understanding and trust.
It is the compounding mindset that will also transform you in terms of personal development. Even though reading 30 minutes a day might not seem like much, over the course of a year, it will add up to dozens of books that will all deepen your learning and perspective. Similarly, even a five-minute daily meditation will improve your emotional control and mental clarity over time.
The accessibility of the compounding attitude is what makes it so beautiful, my dear friend. It does not call for extreme efforts or significant life changes. Instead, it demands perseverance, constancy, and faith in the procedure. It is about having faith that the modest everyday investments you make in your knowledge, your relationships, and yourself will eventually pay off handsomely.
Adopting this perspective can cause you to reorient your attention from pursuing short-term satisfaction to focusing on long-term growth. But, over time, you will start to appreciate the journey and realize that real change occurs gradually, almost imperceptibly, until you cannot believe how far you have come when you look back.
The Obstacles in the Path
I would be irresponsible if I did not bring up the difficulties you may encounter along the way. Compounding is a straightforward process, but it is not always simple.
The temptation of rapid wealth will entice you. When you witness friends or coworkers making huge profits on risky investments and ventures, you could start to question whether you are missing out. There will be market downturns that will try your patience and cause you to reevaluate your plan.
These moments distinguish people who are only aware of compounding from those who actually understand its power. It is easy to believe in compounding when markets are up and your portfolio is growing. It is much harder to stay the course when everything seems to be falling apart. But remember that market downturns are not the enemy of compounding. Indeed, they could present chances for you, given your lengthy time horizon.
The Joy of Watching It Grow
I want you to remember one crucial point as you start your journey. Although compounding might yield amazing rewards, you can find joy in the process itself.
Give yourself time to enjoy the little victories along the road. When you hit your first ₹1,000, ₹10,000, and eventually ₹100,000, celebrate. Every accomplishment is evidence of your diligence and vision.
Above all, though, take pride in the idea that you are doing something worthwhile. You are playing the long game in a society that values the spectacular and the instant. You are now making choices that you will be happy about later.
Before I close this letter, I want to leave you with one last thing. Compounding is not limited to finance, but is a way of life. It is about realising that time is your most valuable resource, that consistency is more important than intensity, and that big things frequently begin small.
Start early. Start small if you need to, but start. Let compound interest work its magic in your financial life, while allowing connections, experiences, and knowledge to multiply and enrich every other area of your life.
As they say, the journey of a thousand miles begins with a single step. One investment, one virtuous habit, one choice to play the long game, and you are on your way to financial freedom and a life of wealth, material and otherwise.
I wish you all the best on this exciting journey. May your investments compound, your knowledge grow, and your life be rich in all the ways that truly matter.
Warm regards,
Vishal
Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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