A tale of Bangali Cinderella and the secret investing formula

Remember the cartoon character named Cinderella? In the tale, she lived with her abusive stepmother and stepsisters who treated her very badly and threw her into poverty. 

Fast forward to the core of the story - there was this ballroom party from which the prince of her kingdom will choose his future wife. But she had no good clothing or such for herself to attend this event. But then, with some magic of a witch - Cinderella gets herself a fancy dress, some horses, a carriage, and a pair of shoes right before the event. 

You might be asking, "where was the catch?" Well, the catch was that the magic will fade away exactly at midnight and all those fancy stuff she's got from the witch will turn back to its original forms. 

Fast forward, she makes it to the party. It was so glorious and big - and the boys there were so handsome that she just could not resist herself but stay back for a while. Finally, just when things started to get rolling for her, she looked at the clock. Tick-tock-tick! It was just a couple of minutes away from midnight. Damn it! Cinderella immediately packed her stuff and ran away from the castle lest the prince figured out who she really was and the social class she belonged to.

Now, a couple of lessons from this story:

Lesson No.1: If you really want to attract a prince or princess - get yourself fancy things.

Lesson No. 2: Always look at your watch - as 'fake it till you make it' without a solid base - fades away pretty soon!

Just kidding! The real lesson lies in our core human behaviour. The temptation of a real treasure hunt is so strong and biologically so ingrained that we can't help but often give ourselves into it. 

We see nothing but the same human phenomena taking charge of the general investors in the Bangladeshi stock market. Warren Buffett said, "You don't find out who's been swimming naked until the tide goes out." Just as it was only when the clock hit midnight Cinderella figured that it was too late - you will also get to see the investors cheering for the junk stocks lately figure out the same. 

When does that happen? No one knows but sooner or later, unfortunately, that's the only financial destination left to those gullible investors. You say, "what are you talking about, Riyan? I just made a couple of thousand Taka the other week from trading". Yes, my friend, and then you lost them all in the same place where you've got them from.

Let me try to lay out the wealth creation 'funda' with all of you today. Ssshh! Don't share it with your neighbours - it's just between us girls - you know! Here goes the 'funda' - no matter where you are in life and how much money you have - start investing today. Let's say you are just 25, graduated, started working and as you're still living with your parents saved about Tk1 lakh this year. And let's just say that you invest in only five to 10 good quality stocks from your broker and managed to get around 10% compounded return including dividends (which had been easily attainable historically from this market - if you had successfully ignored all other calls from your broker and not look at the stock quotation every day!). 

Thirty years down the road, when you are 55, that single amount will turn into Tk17.5 lakh. Fine! The next year - you save another Tk1 lakh and like a smart person invest the whole thing. Again, at the age of 55, that Tk1 lakh becomes Tk15 lakh. Now, you say - What??? Yes, that's right. 

Our human brains are very good at understanding linear growth but we suck our thumbs at exponentials. We can't just understand the depth of compounding without really having to calculate them on a piece of paper. Well, now you have earned quite a bit of experience in your job so you get a raise and start saving Tk2 lakh every year onwards. Again, at the age of 55, your investments in the 3rd, 4th, and 5th year would turn into Tk28 lakh, Tk26 lakh, and Tk23 lakh Taka respectively. Then with 5 years of experience, you now get another raise and now you start saving Tk2,50,000 a year and invest them all until your tenth year of career and then you stop adding to that investment account. 

Not so surprisingly, your cumulative investment of Tk20.5 lakh for 10 years now at 55 turned into a grand sum of Tk2.25 crore. And if you let those investments run another five years, it will become Tk3.6 crore - if 10 years more, then Tk5.8 crore. 

With that amount, I'm sure you will be able to pursue a decent life in this country. And with irrational interest rates of the National Savings Scheme or 'Sanchayapatra' continuing, most of you will have more than you would require at that age. And now that you know the 'funda' of wealth creation. Stop listening to all naysayers - just go and do it! And send me a cheque when you are 55. Just kidding!

Zahidul Islam Riyan is a NY-based Hedge Fund manager. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.