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Friday, January 16, 2009

Compound Interest

Albert Einstein - in the early part of last century - once declared that "Compound Interest is the Most Powerful force in the Universe".

So powerful, that it's also been described as the 8th Wonder of the World. (which I think is an under-estimation - I would put it the 1st Wonder of the World *grin*)

Warren Buffett - one of the world's richest man living today, if not the World's richest man ever in the history of mankind - is a living example of what Compound Interest can do.

Yes, Compound Interest is that powerful.

But what is Compound Interest really? Do you really understand the mathematics behind Compound Interest?

Imagine this scenario.

Let's say you are a super-investor who can double your money every 2 years.

Yes, 100% return every 2 years.

And every time you doubled your money, you continue to do what you do, i.e. you let your interest work for you.

To me, this is a very, very tall order. Not impossible over the short term - from time to time, you hear of someone doing this. But almost never over a long period like 16 years. Even Warren Buffett himself doesn't do this throughout his nearly 6 decades of investing, and I doubt there is even a single 16 year period where Buffett achieved this. Sure, a year or two here and there interspersed with some lower years, but by and large, he falls short of this.

But let's say you have this ability to obtain 100% return every 2 years, over just a 10 year period, so, let's not talk about 16 years yet.

What does this mean?

For example, let say your living expenses 10 years ago was $50,000, or approximately $4,000 per month.

Of course, 10 years ago, $4,000 per month is not a bad sum, although probably not a terribly large sum.

If you live in KL, $4,000 per month 10 years ago is enough to survive.

Maybe not enough to drive an expensive BMW and live in a nicely renovated bungalow and to eat shark fin soup and abolone regularly, but $4k per month is enough to survive in KL if you watch your expenses.

But my question is what if - instead of spending $50,000 10 years ago, you had invested that in a money making machine that can double your money every 2 years.

How much would that $50,000 10 years ago be worth today?



What if I tell you $1.6 million? Yes, $1,600,000!

Why $1.6 million?

Well, in 10 years, this means that the money has doubled 5 times, if you can double your money in 2 years.

So, 2^5 = 32.

Which means every $1 becomes $32 in 10 years time.

Which means $50,000 becomes $1.6 million in 10 years time.


And that $1.6 million today is just from 1 year saving of expenses 10 years ago.

What about the saving from expenses 11 years ago? 12 years ago? 13 years ago? 16 years ago?

You'd think someone with this ability would be worth at least 8 digits, if not 9 digits today isn't it?

So, why is he wasting his time blogging, sending hundreds of emails, making hundrends of comments all over the Net, spamming every blog?

And worse, not even accepting my genuine business offer of $4 million to $8 million per year on the condition that he allows me to audit his trading records over the past 16 years?


Anyway, as usual, I'm told that I don't know what I'm talking about ... *whistle* *wink* *grin*

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