The Power Of Compounding | Where Are the Customers' Yachts? | Lab Of Rich

The Power Of Compounding

In this blog, you will learn how you can get rich with the power of compounding. This information is taken from the book "Where Are the Customers' Yachts?" written by Fred Schwed. 

The author goes for a walk in a city and the people there show the author very expensive yachts, this one is a banker's yacht, this one is a broker's yacht, and this one is an insurance agent's yacht. After some time the author asks that this is fine but Where is the customer's yacht?

On hearing all this, everyone there starts laughing and says that the customers here are not so rich that they can buy Yacht.

This is a real-life Incident taken from the book "Where are the customers' yachts?" written by Fred Schwed who was a stock broker. This book is 80 years old but the fundamentals are the same. 

In this book, the author has told us the secrets that bankers, stock brokers, and insurance agents never tell the middle-class people, and they keep getting rich, and the middle-class struggles.

I am going to explain this to you today because there is no such thing as financial education in school.

In this blog, you will read about three steps by which anyone can easily become rich.

• Power Of Compounding

Compounding is when you invest money it earns more money and when you invest them too it earns more money and this process continues.

Let me explain to you the power of compounding with the help of an example.

Suppose you invest 10 lakh rupees in some stock at 26% for 30 years. Then how much your money will be after 30 years? 

By using the rule of 72 [ This rule states that if we need to double our amount in (x) years then divide 72 by (x) ]

72÷26=2.7 (Approx 3 Years)

This means at a rate of 26% your money will get doubled after every 3 years. 

Therefore

• Today: 10 Lakh
• After 3 Years: 20 Lakh 
• After 6 Years: 40 Lakh
• After 9 Years: 80 Lakh
• After 12 Years: 1.6 Crore
• After 15 Years: 3.2 Crore
• After 18 Years: 6.4 Crore
• After 21 Years: 12.8 Crores
• After 24 Years: 25.6 Crores
• After 27 Years: 51.2 Crores
• After 30 Years: 102.4 Crores

This is the power of Compounding.

This is the reason why Albert Einstein considered compounding the 8th wonder of the world.

Now many of us must be thinking that this does not happen in real life. In real life the stock market is unstable and you are right but in the long term, you can easily get 15%-20% in the stock market. Because of the fear of losing money in the stock market, many people invest their money in FD because they are getting a fixed 7% return and because of this banks get richer and the people who invest money remain middle-class.

Those who have good financial knowledge know that the stock market will give excellent returns in the long term. If 1 company in your portfolio is successful and all the others fail then that single company will recover all the loss and will make you rich.

• Why No One Talks About It

Let us understand how this investment industry works.

There are 2 sides to this industry

• Buy-Side -

This side includes banks and insurance companies. This side earns a profit when you deposit money in their bank or buy their insurance policies.

This side sells policies like (a deposit of 2.6 lakh for 6 years and after 20 years you will get 50 lakh rupees). If any person is financially educated then he will know that he can invest the same amount in stocks and can easily earn 1-2 Crores at the same time. 

• Sell-Side -

This side includes stock brokers. This side earns a profit when you do more transactions i.e when you buy company shares and sell them.

Those who enter the stock market by taking courage, then they have to face a big problem because whenever you sign up for a brokers service then they provide additional free services like they will provide market details through email and videos and some brokers will provide daily phone calls telling about which stocks to buy and sell. Many people happily accept it because who does not like free money. But when you will study the history of successful investors or listen to their interviews then you will know they will recommend long-term buy and hold only.

It means those who invest patiently in the stock market will make money and those who will buy and sell will lose money in the long term. But if everybody will invest patiently then how will these brokers earn? It means if the broker lets you become rich then he will starve himself.

"The Stock Market Is A Device To Transfer Money From The Impatient To The Patient"

• Using It To Get Rich

Now let us understand how to use the power of compounding to get rich.

Many of us must be thinking that we should invest in stocks, but what if the company becomes bankrupt? 

Let us assume the worst situation that you invested in 6 companies for 30 years (1 lakh in each company) and let us assume that 5 out of 6 companies go bankrupt and only one company survives and that company is not so successful that it gives you an interest of 25% to 30%. It only gives you an interest of 20%, then your portfolio will look like this.

And if 3 companies survive out of 5 then your portfolio will look like this.

And this is better than F.D, Mutual Funds, or other Wealth Saving plans. Investing in the only field where you can earn a lot of money even if you are wrong, just you should know where to make a mistake. Everyone tries to know which stock did Rakesh Jhunjhunwala buy, but very few know that the major wealth of Rakesh Jhunjhunwala comes from a Titan company in which he invested when its price was Rs 3 and now its stock price is Rs 2400.

Conclusion

Those who will understand the power of compounding will use it to become rich. Compounding doesn't work overnight, it is a long and guaranteed way of becoming rich.