Credo Capital

“The important thing is to find wet snow and a really long hill. –  Warren Buffett explaining compounded returns via snowball effect.

Snowball effect describes something that starts out in  a small way, gathers momentum with time and has the highest effect in the end. Investing is no different, no investor ever started out in a big way, recently i saw an excellent video by Mohnish Pabrai an US based investor who has made  26% pa since 1995. Mohnish is an avid Warren Buffett fan and has not only created wealth for his family but is also a great philanthropist. 

Let us forget 26% returns of Mohnish and stick to 15% return for equities ( stocks ) as a probable return since that is the market return in Indian context for the last 20 odd years.

Starting out with a capital of 1 lac and investing for say 30 years it takes approximately 6 years to reach 2 lacs, but only three years to reach next level ie 3 lacs, 2 more  years to reach 4lacs and hardly 1.5 years to reach 5 lacs.

The snow ball effect moves big time after this,  it reaches critical point when the returns are higher than the initial investment of 1 lac,  ie annual returns itself is higher than the initial investment of 1 lac. and after this the annual returns become greater than the initial investment. In the last year ie 29-30 the returns are a whopping 7 times compared to the initial investment.

Though this is just school level maths, the implications are life changing, if you have 10,000 Rs today the choices are two either spend it or invest it, if you spend it the implications for your future wealth is tremendous around 5.7 lacs in 30 year if you get 15% return. There are three simple things to observe ie the more you save matters ie every rupee counts, the earlier you start to invest matters, a 60 year old can not expect to compound his wealth for 30 years( though he can do so for his children or grand children ), whereas a 30 year old can. Finally more you earn ie rate of return obtained matters.

to recap the three ingredients to snowball your way to wealth.

1. Earlier you start investing

2. More you invest

3. Better returns you get

Ideally one should have some investments before marriage and start adding to it as soon as one is settled a bit after marriage, review and if possible increase your investment post every salary increase or income.

The toughest question one can ask is where can i get 15%?

Stockmarket index like BSE Sensex have given around that returns in the past 20+ years Few equity mutual funds have a done a better job to give 20% returns. So even if we expect either similar returns or even lower. Irrespective of whether the return is 12% in future or 15% not the big question but to get the other 2 parts of the equation ie saving more and starting early.

Equity investing remains best way to go to compound wealth and equity mutual funds remain best way to invest in equity. So next time you are tempted to buy the new Iphone remember you may be throwing 10 lacs away in future wealth for something that hardly lasts year or two. This is just lump sum investing, the story gets much better if some money can be added every month to the kitty via equity fund SIPs.  Happy investing and remember the snowball effect always.