The Magic of Compounding

“Compound interest is the eighth wonder of the world.  He who understands it, earns it… he who doesn’t… pays it.” – Albert Einstein

Once upon a time, in the ancient land of the warring elephants and sprawling paddy fields, there lived a distinguished Siam king endowed with immense wisdom.  Under his judicious rule, the kingdom flourished with triumphant battles against his enemies and bountiful harvests within his kingdom’s boundaries.

The shrewd king had a cerebral leisure pursuit – he liked to occupy himself in the intellectual game of Chess to learn the arts of war.  He spent hours immersing himself in the profound game and in no time he became the strongest player of all time in his kingdom.

With no one close enough to challenge him in the game, the king naturally felt bored.  He soon sought the kingdom and beyond for players that could contest him in the intricate game but everyone who confronted him failed.

One day, a Persian Grandmaster on board a ship paid Siam a visit.  The gracious king soon heard about it and welcomed the Grandmaster with a sumptuous meal.  After the extravagant banquet, the king challenged the Grandmaster to a game.  The grandmaster delightfully consented.

After a grueling 10 hours contest, the king eventually lost the game to the more skillful grandmaster.  Although the king had unfortunately lost, he was ecstatic that he could find his match.  The king pleasantly inquired the Grandmaster what kind of gift he would like to receive from the king.

The Grandmaster pondered for a moment and replied, “The chess board is made up of an 8-by-8 grid of boxes.”  He then continued, “I would like to have a grain of rice on the first box, double that amount on the second box and then double that amount again on the next box.  And so on and so forth for all 64 boxes.”  The benevolent king was puzzled, why did the Grandmaster request so little when he could give the Grandmaster much more?  But he gladly agreed to the Grandmaster’s request.

The king proceeded to order his subjects to give out the rice as agreed upon.  First box is 1 grain, second box is 2 grains, third box is 4 grains, and fourth box is 8 grains…

Upon reaching the 10th box, it’s 1024 grains.  That’s barely one tenth of a cup size – it’s nothing for a prosperous kingdom like Siam.  The king marveled at what a good deal he’d arrived at and raised the question to the Grandmaster, “would you like to reconsider your request again?”  The Grandmaster gentlely thanked the king and politely declined.

The truth of the matter raised its ugly head as the dispensing of the gift proceeded.  On the 20th box, it’s 1 million grains already.  That’s 20 kg worth of rice.  It’s still affordable.  But on the 30th box, the subjects had to cart in 20 tons of rice.  By the time the 40th box was reached, all the warehouses in the kingdom were exhausted and there was no more rice left.  The giving out of the gift could simply not continue or it would have bankrupted the nation.

Needless to say, the king was now furious.  The no longer benevolent king ordered his guards to behead the Grandmaster for his trickery.  The Grandmaster cried foul but his wailing fell into deaf ears.

That, my friend, is the story of the magic of compounding.

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