Chess & Compounding

3.5 minute read

You are going to think I am bragging or arrogant, and you are going to think that I have achieved this level…

However,

I assure you this is just a story, and with my caveman's brain still figuring out the maths of it.

Long ago, there was a king, doing maths with his caveman brain :)

One of the peasants, a villager, and an inventor walked to the castle and introduced the game of Chess to the king… After understanding and playing the game for a bit, he was so excited.

So, the king offered him any reward he wanted. The king thought the game was super intriguing.

As a result, the inventor asked that a single grain of rice be placed on the first square of the chessboard. Then 2 grains on the second square, 4 grains on the third, 8 grains on the fourth, and so on.

Doubling each time. x2 x2 x2

The king, shocked by this small price for such a wonderful game, then immediately ordered his workers to pay the man.

A week later, the villager did not receive any reward…

The king, outraged that the treasurer had disobeyed him, immediately called the workers, and asked why the inventor had not been paid.

The workers explained that the rice is still being counted, and they think by the time they get halfway through the chessboard,

the entire kingdom of rice will go to the inventor!!

The king, shocked by this information, immediately had the inventor killed, as he tried to be smarter than the king.

ishhh!!!!

What is the point here?

This fable is used as a lesson in the power of exponential growth, the power of compound interest.

From the one grain of rice on the first square to the time you get to square 64, there are over 18 quintillion grains of rice on the board.

18,000,000,000,000,000,000

A billion, billion!

In mathematics, it's a demonstration of extreme growth.

HOW is compounding so powerful? I will explain... Let's take $100

When you invest $100 in an asset that grows 10% per year.

After 1 year, the $100 will grow into $110,

($100×10%)=$110. A nice $10 extra.

After 2 years, the $110 will grow into $120... right?

NO.

After 2 years, that $110 will grow into $121.

That extra $1 comes from compounding.

From year 1, your $10 in gains ALSO earns 10% (along with your $100 principal).

So in year 2, it is ($110 x 10%) = $121

However...

Let's say each year you add another $100 to the asset.

So now, you have: $100 initial investment

- $100 added yearly

- 10% annual return

After 30 years, your portfolio will grow to $16,508.03.

And that is $100 a year! That is $8.3 a month. Not bad!

Total of $3000 invested in 30 years, and you walk away with $16,508.03 by not doing anything.

This is the power of compounding:

If you doubled 1 cent every day for 10 days, it will grow to $10.24

1 cent doubled every day for 30 days will grow to $1,073,741,824

A lot of numbers this week, but there is a ton of value.

I will leave you with this quote from Albert Einstein:

"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."

Until next week, keep buying assets.

Stefan