The Game of Compounding

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Once upon a time there was a smart man who invented, what is now called chess board. He took it to the emperor of China. The emperor was so impressed he offered to grant the man one wish. The inventor had a simple wish: He requested one grain of rice for the first square on the board, two grains for the second square, four for the third, eight for the fourth, and so on.

The emperor thought this guy was just another crazy young fool. But as he had promised and the proposal was very simple, the emperor agreed.

But hold your breath! When the men from treasury reached to the last 10 squares, the kingdom was shaken. Filling the chess board’s last 10 squares would have required 35 quintillion grains of rice – enough to bury the entire planet.

The emperor was furious and had the inventor beheaded.

Whosoever had invented this story was certainly a very clever man. This is the story of the power of compound interest.

When things grow exponentially, gains look tiny at first, modest in the middle, and then — very suddenly — they shoot utterly off the charts.

But there is a cliché. The key to making compound interest work is sticking around long enough to make it to the end of the chess board. Not an easy task if the huge return is on the cards.

But there are the few like Warren Buffett with required patience.

See the table, which clearly states that 99% of Warren Buffett’s wealth was earned after his 50th birthday.

  • When Buffett was 21, his net worth was around $20,000.
  • At age 24, he was offered a job, with an annual salary of $12,000.
  • By the time Buffett reached 26, his net worth was $140,000.
  • When he reached 30 years of age, his net worth was $1 million.
  • Going into his forties at age 39, Buffett’s net worth was listed at $25 million.
  • By age 43, Buffett’s personal net worth was at a high of $34 million.
  • But, by 1974, Berkshire’s decreasing share price lowered Buffett’s net worth to $19 million when he reached 44.
  • Buffett’s net worth in 1982 was $376 million and increased to $620 million in 1983.
  • In 1986, at 56 years old, Buffett became a billionaire.
  • As he neared 60 years old, he was worth $3.8 billion.
  • And $16.5 billion by the time he was 66 years old.
  • Within six years — from age 66 to 72 — Buffett’s net worth more than doubled. His net worth at 72 years old was listed at a whopping $35.7 billion.
  • In 2006, he said he will donate 85 percent of his wealth.
  • As of 2015, his net worth was $67 billion.
  • At 86, Buffett shows no signs of stopping anytime soon.

About the author: IE&M Team

Indian Economy & Market is an Indian media and information platform producing data-backed news and analysis on all the vital elements at the intersection of the economy, stock markets, mutual fund, insurance, commodities, currency, technology, startups and business.

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