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The Power of Compounding
Apr 19, 2017

In our interview questions, we gave professor Bakshi a choice of making 100% return over a year versus a steady 15% cagr over five years. Since this was a rapid fire question. He instantly replied, 15% cagr over 20 long years!

This question though may seem simple had a deeper meaning attached to it. The two main variables involved in compounding is the rate of return and number of years.

In his teachings, professor Bakshi always recommends that you don't just blindly look at the higher enticing 'Rate of return' in the short run. Think about longevity i.e. it is preferable to have a lower yet steadier rate of return for a long period of time. This is key.

However, very few people benefit from the power of compounding. The primary reason is the inability to delay gratification and the urge for action.

For more than 37 years, the benchmark index, BSE Sensex has grown at an average annual rate of around 16%.

As is always the case in creating wealth in equities. Time in the market is always matters more than timing the market. You also benefit from compounding too.

This Chart Of The Day was published in The 5 Minute WrapUp - Our Private Class with India's Value Investing Guru

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1 Responses to "The Power of Compounding"

Dr. Atul Tiwari

Dec 12, 2017

SIP- Only works when NAV is going down. In a rising market your average buying cost increases & earnings suffer even if market is rising at the time of selling. If market goes down at the selling time, you may suffer heavy losses.

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