Thursday, October 20, 2011

Chess Board and The Power of Compounding.

It is been long ...not finding time to update though there are lots and lots to share.... Today was cleaning up old papers and suddenly old advertisement of SUNDARAM BNP PARIBAS Mutual fund attracted me. The advertisement very beautifully and effectively teaches the power of compounding. I have read many articles on compounding of returns but none equals this as its simplicity makes understanding very easy even for lay man. Now you read, understand and start implementing....essential for becoming millionaire..
Chess Board and The Power of Compounding

There was once a poet who fell upon such hard times that he was no longer able to feed his family. Hearing that the king greatly encouraged talent and was famed for his generosity, the poet set off for the Royal Palace.

When brought before the king, he bowed low and asked that he may recite a poem. On hearing his recitation, the king, well pleased, asked him to name his reward.

The poet, pointing to a finely wrought chess board before the king said " Your Highness, if you place just one grain of rice on the first square of this chess board, and double it for every square, I will consider myself well rewarded."

"Are you sure?" asked the king, greatly surprised. "Just grains of rice, not gold?"

"Yes, your highness" affirmed the humble poet.

"So it shall be" ordered the king and his courtiers started placing the grain on the chess board. One grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on. By the time they came to 10th square, they had to place 512 grains of rice. The number swelled to 5,24,288 grains on the 20th square. When they came to the half way number mark, 32nd square, the grain count was 214,74,83,648 - that is over 214 crores! Soon the count increased to lakhs of crores and eventually the hapless king had to hand over his entire kingdom to the clever poet. And it all began with just one grain of rice!

Moral of the Story: Never underestimate the power of compounding. If you stay invested long enough, it will work for you. A small sum invested every month from the beginning of your work-life can lead to a very impressive amount at time of your retirement.

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