Grow your wealth from 10 Lakhs to 100 Crores: Power of Compounding

Learn about the Rule of 72 & Warren Buffet's secret sauce.

Power of Compounding

One of my role models, Ramesh Damani famously delivered a talk where he spoke about how anyone can grow INR 10Lakhs (~13000 USD) to INR 100 Crores (~13MM) in 30 years. His formula was simple - if he can get his investment to double every 3 years, with a 24% IRR annually, he would grow any sum of money (in this case 10L) into a serious sum of money (100 Cr - which is serious money for anyone). 

Now you may be wondering how the hell does that even work? 

Let me show you! If money is doubling every 3 years then by that logic → 10L becomes 20L (3 years later), 20L becomes 40L (6 years later), 40L becomes 80L (9 years later), 80L becomes 1.6Cr (12 years later), 1.6Cr becomes 3.2Cr (15 years later), 3.2 Cr becomes 6.4Cr (18 years later), 6.4 Cr becomes 12.8Cr (21 years later), 12.8 Cr becomes 25.6 Cr (24 years later), 25.6Cr becomes 51.2Cr (27 years later), 51.2 becomes 102.4 Cr (30 years later)!  

How does one calculate the yearly return required/ or time period?

Whenever we talk about doubling our investment every few years, we can use the Rule of 72 to work our own numbers. If you want to calculate how much time it takes for you to double your investment, use this formula: 72/Rate of Return= Number of years.

In our previous example, we assumed a return of 24% annually and 72/24= 3 which is how we calculated money doubling every 3 years. You can use this formula even for lower returns, for example Fixed Deposits (assuming 6% returns) = 72/6 = 12 years or Index funds (assuming 12% returns) ⇒ 72/12 = 6 years. Now depending on your risk profile and your net-worth goal, you can work backwards to calculate how much IRR you need to achieve on a yearly basis to double your money every few years. 

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What does this teach us?

The key lesson I want you to leave with is to think about investing & finance in an ‘exponential’ way vs the ‘linear’ growth that we as humans are programmed to rely on. As you can see through compounding and Rule of 72, growth in investing is exponential over the long run and the secret sauce is time.

If you missed my previous newsletter, the example I shared was that of Warren Buffet who achieved 90% of his wealth post his 60th birthday using time as his ‘magical’ instrument. He started investing at 10 and is still investing way into at 90. That’s 8 decades of compounding that has worked in his favour - if we use the rule of 72 and assume his return as 18%, so he’s doubled his money every 4 years and with an 80-year time span, that means that he’s doubled his wealth almost 20 times i.e 1048576x growth!

It really doesn’t matter how much money you start with (as you can see that’s not an input into the rule of 72 calculation) - the two things you need to focus on as an investor are your annual rate of return and patience i.e Time. Give yourself at least a 30-40 year time horizon to compound your wealth, which is why starting early is important. When you’re young, you may not have a whole lot of money but you most likely are a ‘time billionaire’. I’m sure Warren Buffet & Charlie Munger would also trade a significant portion of their wealth to buy time if they could. But that’s not how life works, so may as well use Time to your advantage by investing the majority of your income when you’re young and being patient & disciplined, to reap the benefits decades later. 

A screenshot from one of my favourite reads this year, Psychology of Money by Morgan Housel - that really shows that it doesn’t matter where you start. 

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