Veteran Investor Raamdeo Agrawal Swears By This Investment Philosophy
Compounding is the eighth wonder of the world, Raamdeo Agrawal says.
The power of compounding was the theme for this week’s episode of BloombergQuint’s special series How To Invest With Raamdeo Agrawal. “I never thought the power of compounding had any connection with stock market”, chairman of the Motilal Oswal Asset Management Company Ltd. told BloombergQuint's Niraj Shah. That changed quickly.
Agrawal said he soon realised that the market works on compounding – which is nothing but “growth on growth” or “interest on interest”.
He referred to the “Rule of 72”, a simplified way to determine how long an investment will take to double itself. For example, a 25-year old person who would work till 65 could see his or her wealth multiply 10,000 times in that period, given a compounding rate of 25-percent.
According to Agrawal, a few instances where compounding works well include:
- Financial Planning – Achieving Goals (Example Retirement)
- Valuation Of Stocks – Understanding Present Value
- Comparison Of Financial Products Performance Over Different Time Period
“Compounding is the eighth wonder of the world. Those who understand it, get it. Those who don’t understand, it pay for it. Consider a Rs 1 crore investment generating 15 percent yearly for the last 20 years. In simple interest, the total amount after 20 years would be Rs 4 crore while in compound interest it would be Rs 16.4 crore. That’s the power of compounding.” Agrawal said.
Watch the full conversation with Raamdeo Agrawal here.
In the first episode, Agrawal talked about the “power of focus investing” where he explained that irrespective of the price, the game is to find value.