Key to Wealth

Key to Wealth

We all want to be rich and want to amass huge wealth. But the fact is that 1% of the people own 64% of the overall wealth of the world. What is that they do? Do they really have a magic wand which makes money for them? We all work hard but then why only few are blessed by goddess Lakshmi. Let’s discuss what is the mantra which multiplies wealth and how can all of us become wealthy.

A real life example:

In a very formal discussion with a doctor couple, I was having a talk about investments. They said that real estate is the best investment and see how it multiplies wealth and they gave their own example. Let me put the example for the benefit of all readers.

Example 1: Their grandparents bought a piece of land in 1947 when they came from Pakistan after independence. They bought that piece of land for Rs. 1000/-which is now worth Rs. 5 crore. Being a financial guy, I just calculated the return on investment and it came at 17.5% p.a. “Just 17%!” said the couple. No, we gave you the wrong figure; the land is worth Rs.10 crores and the rate of return should be 34%.

Again I went back to my calculator and instead of 5 crore, I wrote 10 crore. The rate of return was 19%. This again baffled the couple and they now asked me to calculate the return at a value of 20 crore. The answer was 20% p.a.

The couple was amused. They thought that the rate of return should be some astronomical figure but it was only 20%. So how is that they have huge wealth and why by changing Rs. 5 crore to 10 and 10 to 20 crore is not making any difference in the rate of return.

Wealth formula

People who have wealth are just ordinary people but they have understood the formula of wealth in most extraordinary way. Many people think that wealth is created by getting highest return. No, that is not the case. What we need to remember that high returns can come now and then but they cannot come forever. The law of average works and over a period of time, average returns only come.

Sachin Tendulkar is a classic example of it. He could be regarded as one of the best batsman alive on planet earth. What makes him the best? Does he have the best capability? The answer is that his capability is not unique to him. There are many batsmen who have better batting averages than him. But Sachin went on and on and on; but others came and then went quickly. Sachin played for 24 years and that’s what mattered the most at the end.

Similarly, what wealthy people got to know is that there is no point running behind high returns or in Sachin’s language-making 100 runs every match he played. But critical is to get better returns over a long period of time.

Mathematically, Wealth Formula is

Principal x (1 + Rate) ^ No. of Years

There are three variables – PRINCIPAL, RATE and TIME. Most people concentrate on RATE factor. But mind you, that is what they really cannot control too much and at the end, that is not what matters the most.

Other factor is principal. Now we all have limited resources which can be invested. If you want 10 crores, simple invest Rs. 5 crore in FD for 10 years and you will have it. But one may not have 5 crore today. What it means that Principal factor is limited.

The last factor is the No. of years. Often people ignore this and very few understand the importance of this. That is why 1% holds 64% of world’s wealth. Talk of Bill Gates to Warren Buffet, from Tata’s to Birla’s; talk of that doctor couple who holds that piece of land. The key to their wealth is not extra-ordinary returns but extra time they gave to their investments.

It is said that scientist Albert Einstein had the best human brain ever. He often said – Compounding is the 8th wonder of the world. Compounding works when interest is earned on interest. But that can be possible only when we give time. Time is a factor we can control the most; rest others are not really in control. Do give time to your investments and then you will see how wealthy you will be over a period of time.