The Power of Compounding- The four most powerfull words in the field of investment

Compound interest is the Eighth wonder of the world.
-Albert Einstein

The most charismatic scientist ever existed in the world said that. So it must be of some value. Does it really??

Let's do some thinking-

What is compound interest?
If you have ever put fixed deposits (FD) in the banks then the banks give some amount of money at predetermined rates extra at the end of the FD tenure, that extra money is called interest. But when the bank gives interest on interest in certain FDs it is called as compound interest.

For example we book an FD for 10k at 10% interest rate for 2 yrs then at the end of two years as per simple interest rate we will get 1k interest for first year and 1k on second year, that is total 12k. But with compound interest we will get 1k as first years interest, plus 1k as second years interest, plus 0.1k interest on the interest of first year(i.e.1k). So we will get 0.1k more in the case of compound interest.

So this means compound interest is a profitable deal. The compounding magnifies as the time goes by as we get interest on interest on interest on and on...

So indeed it is the Powerfull thing.

In real life how can we benefit from the power of compounding?
Let's think about money first.
Now a days banks does not give meaningfull interest rates. They do not provide interest rates greater than inflation rates by wide margine. Which is necessary for financial freedom.
(For those who do not know what inflation is- inflation is the reduction of value of the currency, that is if you can buy a burger now with 10 bucks, you will definitely need more than 10 bucks to buy the same burger 1 or 2 or 3 years from now. That is the inflation)

So who provides such interest rates and that too laced with the power of compounding?
Possession of real estate is one source. Generally the prices of real estate grow more than the inflation but with a small difference. But let me tell you one thing, a small difference in inflation and compounding rates can do wonders if given sufficient time. One can do the research for purchasing property on local websites, one can also get average real estate price growth rates for their region from local government data or government surveys. Also known as Compounded Annual Growth Rate(CAGR).

Note:- This CAGR (Compounded Annual Growth Rate) is a very important term if you are dealing with financial freedom or want to be rich.

There is another way too- Investing in companies which earn decent amount of profit and are able to reinvest it in to their business earning more profit. Some companies can earn incremental returns on reinvested capital.

You must be thinking investing in stocks is like gambling.

Well, I strongly disagree. If done RIGHT, it can compound your money like nothing else.

RIGHT means thinking like an owner while purchasing the shares. Thinking you are buying the company instead of just a piece of paper.

If you do not understand the balance sheets or the cash flows, you can invest in the index funds as a systematic investment plan, that is invest an amount of your monthly income which you do not need for next 5-6 years. You can easily see how much your index fund have given returns in the past for extended amount of time and get an idea about the ups and downs and average returns and what to expect.

To understand how some companies or businesses are able to compound money, let us consider a simple example-
Suppose I have a general store in which I sell soaps, every week I purchase 10 soaps from a soap manufacturer at 10 bucks each that 100 bucks total. I sell those soaps at my store at 11 bucks each. I sell all the 10 soaps in a week and get 110 bucks, profit of 10 bucks.

I keep the profit aside and repeat the same process for 10 weeks. So at the end of 10 weeks I have 100 bucks of my origional capital plus 100 bucks profit (10 bucks profit every week for 10 weeks).

So I go to the soap manufacturer and make a bargain with him that I am your regular customer for 10 weeks buying 10 soaps every week, if you can give me some discount I will buy the double quantity. So the manufacturer does his calculation and considers me a valuable and growing customer and it is also economic for him to make bigger batches of soap doing the same bargaining with his raw material suppliers, as I am doing with him.

So now he agrees a price of 9 bucks per soap.

I purchse 20 soaps now and reduce the price of soaps to 10 bucks per soap in my store. My customers now become happy with the reduced price and quickly they finish up my stock of 20 soaps in a week.

So I first started with 100 bucks of capital earning 10 bucks a week and at the end of 11th week I was employing the capital of 180 bucks and earning the profit of 20 bucks.

For earning 10 bucks initially I have to use capital of 100 bucks but to earn 10 bucks more I have to employ only 80 bucks of incremental capital.

This is how good companies can earn better returns on their incremental capital investments, and the better one get that capital from their own profit.

Such companies are the best money compounding machines.

So I hope you have understood the power of compounding works in the case of money.

Money is not the only thing where the power of compounding works. It works wherever we have multiple interdependent systems. In the above case we only thought about money to make the example easy to understand, that is money interacting with money. But in reality money also interacts with other things. Just keep it in mind. You will understand it after you read the next post.

Stay tuned. Till then have a great time..

Sumit
The POWER is when,
you use ODDS
to get EVEN..

Traffic jams - A random thought...

Today I was going through a narrow and crowded road on my motorbike. All my attention was on other vehicles on the road and large number of pedestrians. I have to keep constant watch on their paths, are their paths crossing my path? My brain, eyes and ears were racing to point out any possibility of collision (there were literally thousands of possibilities) and possibilities to avoid them, choosing the best possible path to preserve momentum, reduce braking.

And then there comes a nasty 'Speed Breaker', all I can do is to apply brakes.

I was furious, why did the government installed this speed breaker in the middle of this busy road? There was absolutely no need. Because of the crowd it was almost impossible for an average motorbike rider to go beyond 20km/hr max. Everyone including me was already moving very cautiously.

So as usual my mind got stimulated.

Questions started popping up.

Why do roads get crowded?
Simply because there are more people or vehicles on the road at once.

Why are they on the road?
Because majority of them want to reach some destination.

How can the crowd can be reduced?
By making sure people reach their destinations faster, there would be fewer people on the roads at any time, As their time spent on road will be reduced.

How will they reach their destination faster?
By moving faster or driving faster.

But what do people do in reality?
People slow down when they go through a crowded area. Thereby increasing their time spent on road and also making others to go slow, Like a Choked pipeline. But the people commencing their journey keep adding to the traffic. The situation starts worsening, till the influx of people reduces than the outflux of people(i.e. people reaching their destination).

Our brains are wired to do such crazy things, may be such kind of behaviour was necessary in the ancient days, may be people subconciously like staying in the crowd or subconciously feel safe in the crowd. I do not know the reason, what I do know is this behaviour is causing problems in todays world. We, the Homo-Sepians, the dominant species on earth, have to evolve our thinking as we do not live in the jungle anymore.

But there is a twist.

Have you ever saw how the ants gather their food?
They move in the form of pathways, the pathways are the shortest routs avoidng any obstacles, they move like their are lanes in the pathways, they do not move randomly, where the pathways are broad they move slowly and when the pathway is narrow they move fast.

I do not know whether they know how to act in the traffic in a logical way or not. But their traffic looks definitelt better than ours.

Have you observed it?

The human tendency I observed tells us we are not as logical as we think we are. So watch out from such illogical things we do. And in todays world such human mind's weaknesses are quickly used by marketing people. For example, Their are cute sales girls at the front desks of many showrooms. They know most of the men have weakness, they want to show power and strength whenever a cute girl is watching. So they are going to show it by purchasing what the cute girl is gonna pitch.

So watch out from cute girls.. 'Ouch' it hurts... ;-)

Sumit
The POWER is when,
you use ODDS
to get EVEN..

First step to save money- Clear your Loans.

"Most people spend more time and energy going around problems than in trying to solve them." —Henry Ford

I told you to keep log of your expenses in THIS post, Are you keeping the log of your expences?

The easiest and the most effective way to save more money is to keep a log of your every spending. Stop whining about the problem and start acting as Mr. Henry Ford have said.

Majority of people just neglect the main problem, i.e. the mismanagement of money. The solution to this mismanagement is to accept the responsibility of our own problem. Start finding solutions in ourselves, start controlling the expenses. Soon you will realise the problem getting sorted out.

People usually when faced with money problem never try to go to the root cause of the problem, i.e. their own spending habits. Rather people resort to the solutions provided by the financial institutions. The esiest sounding and the most deadliest solution is the LOAN. I heard people saying that "It is not possible to enjoy life without taking loan now a days, everything is so expensive." In reality things are not that expensive. People only persive things to be expensive. If you have sufficient patience and control over your money then you can easily get to the things you wanted without the need of taking loan.

I am not against taking loan, I am aginst taking loan for buying depreciating things, things which lose value over time or things which need lots of money to maintain or things which don't earn you any money or things which have no use, but just a fancy item.

Loan if taken for financing the right investment i.e. the investment which have very high probability of giving returns far exceeding the interest money you have to pay on loan and that too within the tenure or maturity period of the loan. But the catch is it requires a lot of knowledge, experience and wisdom to find such an investment. Professional real estate investors make good use of borrowed money many times.
But for common people like you and me the loan is a bad thing.

So start paying of your loans as soon as possible. The ugliest (loans with highest interest rate) loan. should be the first in your closing list. For exaple credit card dues have the highest rates and charges so the ugliest they are.

If you have a loan liability you will unknowingly feel a burden on your shoulders. You will realise it when that burden is off your shoulders.

The most interesting, also the most rewarding part is that you will feel more mental peace than ever once this loan burden is off your shoulder.

Our journey as a logical thinker is not just to amass the wealth but also mental and emotional well being, family well being, society well being. Our aim is to be a wiser person every day than yesterday, being a valuable asset to out society.

Keep up with your journey and achieve what you want.

Sumit
The POWER is when,
you use ODDS
to get EVEN..

What you can learn from Jason Bourne!!!

My all time favorite movie character is Jason Bourne (played by Matt Damon) from the movie series- The Bourne Identity, The Bourne Supremacy & The Bourne Ultimatum. Well, I am far from being like Jason Bourne, who is prepared for anything life throws at all the time..

But I do wish to be like him. What I do like the most about him is his cold blooded attitude towards the world. Though he is in great trouble he still concentrates on what is in his control and uses it against the ODDS. Sounds familier?

Well that is what I always try to do, Whenever in trouble I remind myself THE POWER IS WHEN, YOU USE ODDS TO GET EVEN. This one sentence gets me going through any difficulty in my life. It is like a source of inspiration for me. A little sentence which can easily be remembered with perfect metaphor, Quickly recallable, Multipurpose(I still have not got in to any trouble by using this source of inspiration, if anytime I get in to trouble because of it, I promise you, I will tell you ASAP).

So what I observed is that our Hero Mr. Jason Bourne apart from his stunts, always keeps his mind open, do not do things which will get him in to trouble, keeps a low profile, thinks for himself independently (thinking independently is the rarest thing in todays world, just recall when did you last thought about yourself without thinking about what others would say? Or what others do in same situation? We generally borrow thoughts from others and make them ours. This tendency though safe in many times won't get us out of the RAT RACE going around us or won't give us financial freedom either.), never wastes his precious time on thinking about things that are out of his control, but do keeps an eye on them to take advantage when conditions become favorable, he always has goals in his mind, keeps his composure all the time, if conditions are not favorable then simply stays away, he takes only calculated risks.

He is the best at doing all this.

But do you think only a super agent of a secret service in movies only have licence to do these things?? Are these all traits useless in our daily life??

Of course not. We can use all these characteristics for our benifit in our life. When I started acting like an agent just for fun, I quickly realised that, "Man!!! This is not just a secret agent's stuff. This stuff works wonders for an average person like you and me too."

For example when I went to furniture showroom to purchase a wardrobe, I did my homework with my wife, we selected the design of the wardrobe according to our need, as we went to the showroom I started acting like an agent. Imagined that the sales people are my enemy. Started looking for his tactics, and Bingo!! the salesman started playing mind tricks, he started inserting different needs in my wife's mind, she too started devieting from what we wanted, I counteracted by telling "These are not our needs, our needs are what we discussed at home, sorry buddy but we already have selected our model."

But without homework I would have spent atlest 50% more than required.

That was an awesome EUREKA moment for me.

We have our goal to be Financially free,  Happy and Piecefull or adventurous whatever you like.

What are you waiting for?? Be a Jason Bourne, think as if you just came in to conciousness, you forgot all your preconceptions, start moving towards your goal with a fresh mind, start gathering things which will get you there. You must act now or there is our society which is ready to suck you in the RAT RACE. Watch out from it and stay on your mission.

Sumit
The POWER is when,
you use ODDS
to get EVEN..

Quickest way to financial freedom..

There are some legal ways for financial freedom-

Marry a girl or a boy with a rich father.

Or

Get adopted by a rich, childless couple.

Or

For the normal guy or girl like you and me. Start saving most of your income, Reduce your expences, invest wisely, build up your financial freedom corpus. You will need around 30 times the money of your yearly spending, on the safer side to achieve financial freedom.(we will discuss how I came to this number in some later post)

This blog is for normal people so we will discuss about the last option in detail here.

From the way itself you will understand, the yearly spendings have more importance than what you are earning. This is because, spending is the most influential factor here. If you can't control your spendings then you will have no control over your financial freedom. Even if you achieve it, you will run the risk of losing it.

THE KEY IS TO INCREASE YOUR PASSIVE INCOME MORE THAN YOU INCREASE YOUR EXPENCES.

One more advantage is, if you reduce your spending then automatically it will work as your earnings, which will go to your freedom fund. You will learn to live with it which will help you save for the whole life, which is a permanent change.

To achieve the ratio of investments of 30 times to your annual spending you can increase your investments by increasing your earning or by reducing your yearly spending or by dong both.
But some how you have to reach that number to be financially free.

It sounds tough, but not so once you start taking baby steps towards it. That's my favorite way, ONE SMALL STEP AT A TIME, AND YOU ARE ON THE WAY TOWARDS YOUR GOAL, ONE STEP CLOSER EACH TIME.

We will discuss how to save money and what to do with it in later posts.
Till then use your brain to make efficient spendings...

Sumit
The POWER is when,
you use ODDS
to get EVEN..

Is the gap between the Poor and the Rich increasing?

When the Forbes first compiled the list of top 400 richest people on earth, their combined net worth was $93 billion, this was in 1982 while todays top richest 400 have combined net worth of around $ 2.3 trillion. That is increase of around 24 times in around 3 decades. While in the same period average houshold income rose only 2.8 times.

This fact gives the answer to the question as yes, the gap is increasing.

Let's do some brainstorming and ask some logical questions-

Q. Is it of any importance to us to think about it?

A. Of course yes, if we don't know where are we in the society and how the society dynamics works then we can not do anything to get to an advantageous position or benifit more from the social dynamics.

We can put our abilities for better use if we know how our society works.

Q. Why is the gap?
A. To answer this question we have to ask more questions-

Q. What does rich people do different than the poor?
A. They generally run the business or are investors or innovators or doing something very productive to the society or solving one or more problems of society. While poor people are doing the job for their employer and spending most or all their hard earned money.

Q. What are the advantages the rich have over the poor?
A. They have access to capital, access to intelligence, access to manpower and most importantly they make better use of these things than the poor does.

Q. Does the rich people deserve the money they earn?
A. Yes, they have earned their money in legal ways. Generally people buy their product because they are providing value. Generally they bring the revolutions or innovations to the society which make the living easy for the society. They provide the jobs for the most of the population. So they do deserve the money after doing all this.

So the gap is because of what people do. The rich do different things than the poor.

So the next question arises.

Q. Why was the gap narrow in the past and expanding since then?
A. Before the industrial revolution the gap was narrow because mostly the performance of everyone was linked to physical strength, which was almost equal. No one performed exceedingly better than other. The difference between the performance of the best performer and the least performer was very thin.

But then few people started using there brain more and invented things that made them perform much better, both in terms of quantity and quality, their efficiency was higher. For example use of steam power instead of muscle power. So obviously they received better compensation than others. And they deserved it.

Now the technology is much evolved and gives leverage to better ideas. Thoughts can now be converted in to reality more quickly than ever. For example if you want a kind of app on your smart phone which is not available on the playstore, and suppose you know how to make an app, then you can quickly make than app and if it is really usefull then quickly it will spread on internet like a wildfire, just like the facebook or twitter or whatsapp got popular quickly. As a result you will definitely get rewarded much more than if you were doing the same thing a century ago. People are also more receptive to change today than ever.

That is why the gap between the rich and poor is increasing. Basically it is the gap between the knowledgable and the average people.

So the most important question-

Q. What is the use of this knowledge of the difference between rich and poor to us?
A. This knowledge gives us the CHOICE, whether to be RICH OR POOR. To be poor you just have to keep doing your job under a boss. Or to be rich, you have to work on your ideas and leverage the one which give value to the society. Then you will be rewarded according to the value you gave.

Or you can also stand by or support good ideas and there by benifit in the success of that idea. For example if you purchase shares of a company providing value to the society with ethical business and ethical management.

There is one more way of leverage which anyone can use from like right now. That is THE POWER OF COMPOUNDING. We will learn about it in later post.

So with this knowledge of choice in our arsenal now we will end this question and answers session. We will meet soon, till then, Have a Nice Day..

Sumit
The POWER is when,
you use ODDS
to get EVEN..

You can achieve a lot more than you think you can, just start from where you are..

I have read somewhere that we use only around 20% of our brain power, which is our conscious mind and the rest 80% is our subconscious mind. The people who are able to use up to 25% of brain power are the super elite people who make great discoveries or enfluence all the human race up to great extent. For example Sir Albert Einstein.

Well, I don't really know if what I said just above is true or not. But what I know from my own experience is, if you do something repetatively or think something again and again or have passion in something or combination of these things then it automatically goes down to your subconscious mind, your subconscious mind will automatically start working on it, give you the answers like those "AAHAA" moments.

This is just for information, keep it in mind, don't think about it, just leave it that way. We are going do discuss the practical things here. How to use the subconscious mind in simple ways.

Like I just said do something repeatedly, thing again and again, have passion at something, these things sounds easy to do right?

They sound easy because they are. Just be like a baby and start taking baby steps towards your goal. Here the goal is financial freedom and happiness.

The first thing you have to do is to keep a log of your expences, All big and small expences. This is a very powerfull tool for financial freedom. It gives you the idea of where the money is going. Remember MY STORY? I lost my freedom because my expences went high under my nose and I didn't get a hint. You don't have to do that mistake.

You can invent your ways of keeping the log. I keep the log on the big calender I have on my bedroom wall. Every day after coming home I write the expences, I write every expence as quickly as possible so as to not miss anyone. You can do it on your PC or tab or whatever is easy.

At the end of the month I analyse the list. Look for ways to reduce the spending. Locate the unnecessary spending etc.

The trick is not to cut the necessary spendings, but to make them efficient. For example if you are purchasing packages of small quantity or weight of an item then,  instead buy large package,  usually it comes at discount. Sometimes reverse also happens, small packs are at discounts. Try to do some math. Later on you will find it was the most productive time you have spent,  also it is a good excercise for your brain. You can also go to wholesaler. Also think about the travelling cost too. And don't increase the consumption just because you have large stock at home. Just be comfortable with the excess stock at your home.

It may sound a meager amount of saving but consider this,
If you are spending 1k per month on something and you save 10%  of it every month then you will have 1.2k left in your pocket in a year. If you invest that money for 10% annual return and keep adding your savings to it for 10 years, at the end of 10th year you will have 16.3k in your pocket.

So think about it.

Sumit
The POWER is when,
you use ODDS
to get EVEN..

Advantages of being financially free and my real life story-

Being financially free can be defined as, the financial state in which your passive income (i.e. income from your investments which come without any effort on your side) exceeds your expenses.

For example, you have share of a good company who pays double the amount of money you require yearly as divident, so that you spend what you need and reinvest the rest thereby increasing your next years divident.

This is a simple example to illustrate, in practice there are many kind of such sources like rental property or a business etc.

So suppose you are retired (financially free), what will you do?

You can do a hell lot of things, first, if you don't like your current job then you can quit. If you like to start a business you can start. You can give more time to your family. You can watch your children grow. You can teach them how to be financially free. You can go on a holiday of your dreams. You can relocate to wherever you want. Or if you are the lucky one who loves your job then you can continue doing it. But this time your value to the organization you are working for will be far more than ever because as you are financially independent and love your job, you will not be afraid of doing any changes for the good in your organization and that will grow your organization and you will become highly sought after and respected employee of your organization.

Wheeww....  Enough now.... I am just feeling tired to type all those advantages you get when you become financially free, because numerous are coming to my mind. But hey, you can have your own great reasons..

The biggest advantage of financially free is a piecefull life. Life without tension (well one will definitely have positive tension to achieve their dreams). You don't have to worry about your job security, pay hike, lay offs or get up early for work or burn midnight oil and complete projects and presentations unless you enjoy doing it.

So I assume that it is foolish to ask you whether you want to be financially free. If you were not then why would have you been still reading?

Well I am so enthusiastic about it because I was financially free once.

My real life story-

First I came to know about the concept of financial freedom through Robert Kiyosaki's book- The Rich Dad Poor Dad. The book is awesome, a must read. A friend gave it to me when I was 20, quickly I got enfluenced by the concept. I was so much motivated because of the young age that I achieved the freedom before coming out of the college by following extreme frugality.

I also rejected the highest paying job of my college batch, every friend and professor were like "Are you crazy?? You have got the highest paying job in the college, what others just dream of and you are rejecting it?"  The company was astonished, asking 'what's wrong with our offer? Do you have any better offer?'

Life was going very smooth for 2 yrs and then I started drifting from my course, it was too late until I realised it, many huge expences came by, some expected some unexpected to which I was not prepared. And I lost my freedom.

When I thought about it, it became appearant that I was doing all the preparation myself for loosing my financial freedom. I was blowing out money more and more, my reinvestment started declining, they even got in to negative territory, but it was slow. Habit of over spending was slowly infecting me and I was too busy to give any attention. I was distracted by society, slowly accepting the show off kind of mentality. Because of earning pressure I did some investments mistakes. It all resulted in, you guessed it right!! loss of financial freedom.

The good thing is that it took about a month to figure this out. I quickly assessed my situation and came to the conclusion that I need to do a job to increase my income and investments. So after 3 years from completng the college a friend of mine used his enfluence to atleast give me a chance for interview(not a single employer was even ready to shortlist me for recrutment round because of 3yrs of gap after the college). I cracked the interview and the interviewers were impressed and I landed in my first job. I got salary more than what my friend expected, who helped me to get to the interview (the salary was still less than half of my least earning college batchmate, to be true, I felt really bad but atleast I had a job :-) ).

I was able to crack the interview because I always cultivated curiosity and always liked to learn new thing.

One more thing I learned from this experience that knowledge and common sense never go waste.

At the same time I also got married in a traditional wedding ceremony which reduced my assets to ZERO.

I never lost hope and continued to save and invest as much as possible. Invented more ways to save money. Its been 2 years since I have been married, I have a 1 year old son. Despite the outrageous expenses of child birth, his vaccination, purchase of a motorbike, my minimum expenses are 8 to 10 times more than when I was single. I am saving at a decent rate and will able to achieve my goal which I stated in previous post.

This time I am being carefull with my calculation. Added a lot of margine of safety.

We will discuss about my plan for freedom and how you can also prepare a plan for your financial freedom in another post.

Till then read my signature... ;-)

Sumit
The POWER is when,
you use ODDS
to get EVEN..

Why you want to be rich? Using peer pressure as positive motivation

We ended last post with asking ourselves why I want to be rich?
Truely speaking most people does not have a clue about why one want to be rich or why they want to earn money? It is not a simple question. Just dwell over it and try to get the answer.

The answer is your goal. And to set a goal is a very important thing befor going forward otherwise we will be lost. As per the book by Maxwell Maltz- Psycho-Cybernetics humen brain works well when used as a goal seeking mechanism. So to define the goal is the first step to do.

So what is your goal? Just take a piece of paper and write it down. Or you can also write in the comments section so that we can help each other in building a better goal. Like I am writing here.

My near term goal is to be financially free, I should be earning more than my expences through passive income (Passive income is the income which comes without any input from me).
That is my investments are earning for me and growing by themselves.

The time frame is 3 to 4 years.

A side by side goal is to help people achieve it. So we are together in this journey if you also want to be financially free.

The long term goal is to be a wise and successfull businessman to which people come for advice and help in their business.

The time frame is 10 to 15 years.

I am only writing the big goals though they keep on evolving during the course. There are many tiny goals with monthly or weekly or daily timeline. Goals should be achievable in nature and part of the bigger goal. These tiny goals gives us the sense of achievement in our day to day life. And trust me, it is working for me. It keeps me motivated. If we have to do a lot of work for a long time to get the result then we get bored and lose interest after some time.

Always define a goal with a timeline. Do it for small goals first, you will start getting results and will automatically do it for bigger goals. It will soon become a habit for you.

Just try this exercise. Decide what you want. But first write down your goal and why do you want to be rich??? I would like it if you write in the comment section. Stating your goal publicly will put you in the positive peer pressure to achieve your goal which is a good thing.
So, go ahead..

Sumit
The POWER is when,
you use ODDS
to get EVEN..