9From Zurich to disaster
I levered myself up from the seat and walked to the front
of the carriage where they kept a stack of newspapers and
business magazines. It was going to be a long, long journey
and I was determined to have enough reading material to get
through it.
Sitting down across from my portly co-traveller was a beautiful
woman. She was so different from Conrad that she might have
come from a separate biological species. She pushed her North
Face holdall into the luggage rack. Big and red, it stood out like
a bloodstain amongst the beige and grey luggage spilling from
the racks. I read her name tag – Anisa Chabbra – and saw a home
address in South London. Splayed open on the table in front of her
was a book I recognised from a long way back. It’s called Emotional
Investment: What Your Bank Account Says About Your Love Life!
The rules of compounding
Conrad was explaining to Anisa Chabbra how compounding
worked.
‘Compounding is the most powerful
technique in nance. And also one of the
simplest to understand.’ He talked her
through the rst example in Emotional
Investment. ‘Imagine you hand over your
savings to a bank. You agree an interest rate
for a year. At the end of the year, if you don’t take out your interest,
your money will grow.’
investing (see Chapter 19 for more on this subject). This approach
rejects highly-paid analysts in favour of a long-term buy and hold
strategy. I wonder if the loss had anything to do with his change
of mind?
‘‘
Compounding is
the most powerful
technique in
finance
’’
One-way ticket10
On 1 January 2012 you deposit money in a bank $1,000
The bank pays interest for a year at the rate of 4%
So, you get this much money for the year $40
(That’s $1,000 multiplied by 4%)
Which means at the end of 2012 your money has grown to $1,040
(Your original $1,000 plus the $40 of interest)
‘The value of compounding is affected by two things – the
interest rate you get, and the length of time you can leave your
money in the bank. Let’s see what happens to your investment
if you leave your money with the bank for another two years.’
2013
Opening amount $1,040.00
Interest at 4% $41.60
Closing amount $1,081.60
2014
Opening amount $1,081.60
Interest at 4% $43.26
Closing amount $1,124.86
‘In the second year you’ll earn interest on both your original
capital and the interest from the rst year. And in the third year,
the interest on the interest grows even more. It’s like a snowball
rolling down a gentle hill. You put your money in a bank, then
just sit back and watch your nest egg grow.’
I had to concede that Conrad knew the basics, even if his
metaphors were a little scrambled. But only a fool believes banks
are risk-free these days.
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