Let me share a story with you.
Once upon a time, there was a king named Genoros.
King Genoros was known to play Chess with his servants – on one condition.
If the servant lost, they would face a lifetime in the dungeon.
If they won, then they would be free from servitude.
One of the loyal servant’s was named Shrew.
He was known for his logical thinking and careful decision-making.
One day it was Shrew’s turn to play a chess game against the king.
And as expected, Shrew lost to the king and now faced a lifetime in the king’s dungeon.
King Genoros granted Shrew a final wish before his incarceration.
This was Shrew’s wish:
“Your Majesty, I wish for my family to live a comfortable life. Here’s my wish.
On the first square of a chessboard, in the first year, grant my family one grain of rice.
In the second year, grant my family two grains of rice.
In the third year, provide my family with four grains of rice.
Please continue to double the amount every year until the 64th square on the chessboard.”
The king, shrugged, laughed and accepted his peculiar request.
However, he underestimated the significance of this seemingly modest request.
And so, he granted his wish to Shrew.
10 years later, the king would give Shrews family 512 grains of rice.
By the twentieth year, they would receive 524,288.
And three decades later, King Genoros found himself bankrupt and in debt.
He could not afford to give Shrew’s family anymore grains of rice.
He had no choice but to release all his prisoners, including Shrew.
Shrew, was thrilled and was reunited with his family, returned home, and enjoyed the fortunes he had so shrewdly calculated.
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The power of the Rule of 64 – the Magic of compounding!
This powerful story introduces the principle of compounding.
Let’s take a look at how it works when it comes to an investment portfolio.
Let’s assume your initial portfolio is R100,000.
After year one, you make a 36% return. This makes your portfolio R136,000.
Instead of withdrawing your profits, you re-invest the winnings.
In year two, you make another 36% return. But this time it is on the R136,000. Therefore, you earn an additional R48,960 for year 2.
After 10 years, you’ll see your account grows from R100,000 up to R2,164,657 in just 10 years.
What’s important to remember with compounding
When you apply compounding to your trading, your earnings start to multiply and accelerate.
While an initial investment of R10,000, R100,000, or even R200,000 is a good start, it will take five to eight years to really start to see substantial returns.
So, I hope you will take this story into consideration, the next time you want to withdraw profits.