The 8th Wonder of the World

There is a story of a Chinese emperor and a chessboard maker which shows the power of compound growth.

The chessboard maker made a beautiful chessboard for the Emperor. When asked how he could pay the chessboard maker, he merely asked for a grain of rice. The chessboard maker asked that a single grain of rice be placed on the first square of the chessboard. Then two grains on the second square, four grains on the third, and so on. Doubling each time. The emperor, baffled by such a small price for a wonderful board, immediately agreed, and ordered the treasurer to pay the agreed upon sum. A week later, the chessboard maker went before the emperor and asked why he had not received his reward. The emperor, outraged that the treasurer had disobeyed him, immediately summoned him and demanded to know why the inventor had not been paid. The treasurer explained that the sum could not be paid – by the time you got even halfway through the chessboard, the amount of grain required was more than the entire kingdom possessed.

A few lessons to be learned in this story.

  1. Given time (days on the chessboard) your investment will yield outstanding performance.
  2. Don’t interrupt the process of compounding.

The Dow Jones index delivered an average of 11% p/a from 1950 to 2019. Most people think of an average as a straight line especially when it comes to investing, but that isn’t the case. There is a lot of pain that an investor needs to endure to be able to enjoy the gains in the future. Below is a graph that illustrates the volatility of the Dow Jones from 1950 to 2019. What this graph also shows is the periods (light gray) when the index has fallen more than 5% since the last recorded all-time high. What this shows us is that you will most likely have more periods where the investment falls below it’s previous value, but the periods of growth happen quickly and substantially.

Markets can be treacherous, but they always seem to show favour to those who are patient and wait.

Francois Le Clus (PGDip Financial Planning)

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