Interesting Interest

CAPITAL, INVESTMENT and RETURNS


Kautilya [400 B.C.] : Kautilya, the well known expert on Indian Administration and Polity quotes an interesting parable in his treatise which runs like this:

Once upon a time there was a poor Brahmin, a Sanskrit poet, who fell on hard days and found it difficult to sustain his family. He was also an expert chess player. Hearing that the king greatly encouraged talent, he decided to approach the king to help him out. When he had an audience with the king, he introduced himself as a Sanskrit poet and that his specialization was ‘Ashukavitva’ which means composition of Sanskrit poem extempore on any given subject and conforming to the specified metre [Vritta in Sanskrit]. As it was the spring season, The king asked him to compose an extempore shloka on “Vasantha Vaibhavam”[Glory of the Spring season] in a metre known as ;Vasanta Tilakam’. Without batting an eyelid, the poet composed the shloka as per specifications and recited. The king was immensely pleased and asked him to ask him to name his reward.

The poet saw a chess board next to the royal throne. Pointing his finger towards the chess board, “ Your Highness” he said “ if you just place one grain of rice on the first square of the chess board and double it for every square, I shall be happy to take back the amount of rice grains collected at the end of the last square [64th square]. I shall be happy with this gift”. Stunned and surprised by this request, the king asked “Are you sure?”
“Yes. Your Highness, just a grain of rice, and not gold” replied the humble poet. “ So shall it be” replied the king and asked the courtiers to go ahead.

The chess board was brought in front and the courtiers started placing one grain on the first square and carried out the exercise. They placed 4 on the second square, 8 on the third, 16 on the 4th etc. By the time they came to the 10th square they had to place 512 grains of rice. The number swelled to 5, 24, 288 grains on the 20th square. When they came to the half way mark, the 32nd square, the grain count was 214, 74, 83, 648 that is over 214 crores. Soon the count increased to lakhs of crores and eventually the hapless king had to hand over his entire kingdom to the clever poet. And all began with just one grain of rice!

Drawing conclusion out of the above parable and giving sane advice on investments and returns, Kautilya says “Never underestimate the power of compounding. If you stay invested long enough, it shall certainly work for you. A small sum invested every month from the beginning of your work-life can lead to a very impressive amount at the time of your retirement”

A Genius Investor in America: Mrs. Felicity Foresight is a little known but brilliant investor in America who had used an infallible investment strategy to become the world’s riches person. Her secret? Perfect Foresight

When she was born in America in 1900, her parents invested just one dollar on her behalf in a basket of shares. If it had been left there it would now [2003] be worth about 9,000 dollars. But Felicity reckoned she could do much better. Discovering at an early age that she could foresee the performance of financial markets perfectly, she would predict at the beginning of each year which asset around the world would bring the highest total dollar return [income plus gain] over the following 12 months. She would put all her wealth into that asset and reinvest her income, before making a new forecast and shifting her money the following January

By her 100th birthday [2000 A,D] Ms. Foresight had turned her initial one dollar into an amazing 1.3 quadrillion dollars that is, 13 followed by 14 zeros—even after deducting dealing costs and taxes. Since then, despite the three year bear market, she has enjoyed a post-tax average annual return of 29%.

Her nest-egg is now 207 quadrillion dollars.

London Economist dated 4th Jan 2003

Banking Principle : The banker decided that he had been a bachelor long enough. So he took a wife, the said wife being a widow with a 21-year old pretty daughter. Some months later, the banker was seen by a friend in a swank night club. The banker was with his cute step-daughter and he was paying her more than paternal attention. The friend called him on this and the banker’s reply was a classic

“Friend” he said “one of the first rules of banking is: have fun with the interest, but never touch the principal”


B.M.N.Murthy





MIDWEEK SPECIAL --ARTICLE NO.512--CAPITAL, INVESTMENT and RETURNS
Created: Tuesday, July 28, 2009 9:13 PM