A simple lesson on the power of compounding.
November 22, 2021
Albert Einstein once described compounding interest as the “eighth wonder of the world,” adding “He who understands it, earns it; he who doesn’t, pays for it.”
Indeed, as our team reflects on the financial advice we’re thankful for this holiday season, understanding the power of compounding immediately stood out to me as a foundational lesson in my investing journey.
I recall hearing one fantastic illustration to that end when I was younger, in a book called “One Grain of Rice: A Mathematical Folktale.”
It’s a story about a raja in India who kept nearly all of the people’s rice for himself — refusing to share even as famine arrived. But one day a young girl does a good deed for the raja, and in return he allows her to choose her reward. She surprises him by asking for a single grain of rice on the first day. Then, each day for the next 30 days, the raja was to give her double the amount of rice he gave her on the previous day.
“This seems to be a modest reward,” the raja answered. “But you shall have it.”
Of course, it was anything but modest as the power of compounding took hold. Here’s the progression of grains of rice she received:
Day 1: One grain of rice.
Day 2: Two grains of rice.
Day 3: Four grains…
Day 4: Eight grains…
Day 5: 16
Day 6: 32
Day 7: 64
Day 8: 128
Day 9: 256
Day 10: 512
Day 11: 1,024
Day 12: 2,048
Day 13: 4,096
Day 14: 8,192
Day 15: 16,384
Day 16: 32,768
Day 17: 65,536
Day 18: 131,072
Day 19: 262,144
Day 20: 524,288
Day 21: 1,048,576
Day 22: 2,097,152
Day 23: 4,194,304
Day 24: 8,388,608
Day 25: 16,777,216
Day 26: 33,554,432
Day 27: 67,108,864
Day 28: 134,217,728
Day 29: 268,435,456
Day 30: 536,870,912 grains of rice!!
In total, the girl receives well over one billion grains of rice (or 1,073,741,823 grains, to be exact) — a massive haul that would equate to nearly 27 tons of rice that she subsequently shared with the hungry people.
While it’s tempting to dismiss this as a simplistic children’s story with no real-world application, extend the time frame from days to years and we can see this is exactly how fortunes are made for long-term investors in stocks. Notice the vast majority of the rice the girl earns came in the last several days of her 30-day reward.
That’s why we hear stories about a frugal gas station attendant and part-time janitor who donated millions to his local hospital and library. And why, when asked by Jeff Bezos several years ago why more people don’t follow his seemingly simple approach to investing in stocks, Warren Buffett replied “Because nobody wants to get rich slow.”
Indeed, if the stock market is the greatest wealth-generating vehicle our world has to offer, compounding returns are the engine under its hood.
But it takes time and patience to for compounding returns to truly begin to work their magic.
And that’s why we maintain a long-term investing approach here at 7investing — see our third and fourth investing principles here — continuously finding, buying, and holding shares of high-potential, high-quality stocks with the aim of generating outsized returns for our members over periods of years.
I’m thankful for that perspective. And I look forward to watching the power of compounding play out on our scorecard for members in the coming years.
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