JDS Multimedia

9th
JUN

Law Of Compounding

Posted by admin under Business

“It’s the most powerful force in the universe…”

At least that is what Albert Einstein is rumored to have said of compounding. Why would the father of atomic energy, which we certainly knows something about real power, say something about that so untouchable? The power of this mysterious force is best told in the following legend.

Once upon a time a Mogul king wished to reward a local peasant saving for his daughter’s life. “You can have anything you want,” offered the king. The peasant merely asked for one grain of rice to be placed on a chessboard. Court animal began to laugh at the meagerness of this request, but suddenly the peasant audacious hand held up for his silence. “I ask for one more thing,” he said. “Each day of the amount will be doubled grain and placed in the next box, and so on, for all the seats on the board.” The king thought this a trifle bit ridiculous, but agreed. The story does not end well, for place on the 64th there was not enough rice in the entire kingdom to satisfy the request. The king had embarrassed the peasant hanged.

This little story illustrates well the effects of adding sequentially, or more accurately, multiplying, the impact of growth on top of some previous impact of growth. Most people think of compounding in relation to compound interest, and consider it, like Einstein, to be the most powerful force in finance.