If you already have a million dollars or more, this blogpost is not for you.
For all others, I’ll cut the bullshit and get to the chase. I am just mighty pissed off.
When you have less than a million dollars –
Please don’t listen to any or all the Gurus who are propagating 16% CAGR, 18% CAGR, 20% CAGR. You know the usual spiel. Say, you have 5 Lakh rupees. Gurus recommend that you should be happy be 18% CAGR or 20% CAGR and over a long period of time (40 years), you would be so rich, that even the rich would be ashamed.
For all those studies, where you read that if you had invested in quality at any price, and just held on to them for a long period of time (40 years), you would have made enough money to be proud of yourself.
You really want to know what they DON’T tell you.
By the time you are rich, you will be OLD. You will be very old. Your kids and grand kids, of course, would really appreciate all your journey, effort and all the good things that you have done for them. You will just die as a rich man without all the good things before it. That’s just a tragedy.
Since the readers of this blog are reasonably well versed with numbers, let me illustrate it with numbers.
Let me get the first and the easiest thing out of the way without the numbers. People keep doing these fancy calculations in excel about how much their salary is growing to grow, how health expenses will increase, plug in a sexy inflation number and try to arrive at a figure which they think will be enough for retirement.
Let me solve that for you. You need a million dollars (ex-Mumbai). Unless you want to live the luxurious life of Vijay Mallya ,(well, if you were Mallya, you wouldn’t do all these calculations), a million dollars would let you live and eventually die peacefully.
Ok, now for the numbers bit.
Let’s say you start investing at the age of 27 (well, how better it would be if you could start investing at the age of 15, but try convincing your teenage son or a fresh graduate not to spend on the latest smartphone and you’ll know what I mean). You start with Rs. 5 lakh (You can plug in any arbitary number).
Let’s say you manage to do 18% CAGR over a long period, say 40 years. Do you know how much money you would have by the time you are 67? 37 cr 51 lakh.
Whoa. That’s a lot of amount you say. Definitely it is.
But what would you do with so much amount at 67? You would be old, frail and not really ready to say travel widely or eat whatever you want or whatever shaukh (sic) you have.
Ok. So, how much money would you have by the time you are 57? 7 cr 16 lakh. Did you observe the difference?
Ok. So, how much money would you have by the time you are still fit, healthy and want to do what you want – say at the age of 47? 1 cr 37 lakh.
Did you see the difference? Did you really observe the beauty of compounding? You would not dream to live a reasonably luxurious life, traveling where you want, doing what you want to do with 1 cr 37 lakh.
And that’s my problem with folks preaching ‘my target is 18% cagr because the Gurus said it’, ‘I am ok with 16-20% cagr, but I don’t yet have a million dollars’.
Nobody, or rather, from whatever I have read spells out clearly on this intricate relationship between CAGR and Age. You can be rich, but you are already old.
I would rather die with 10 cr, in the process doing what I want than die with 37 cr to make my children and grand children happy.
And that brings me to my real point.
You should really not be aiming anything less than 35-40% CAGR if you are not already a millionaire. It just sucks not to aim for it.
Why did I say 35-40% at a minimum? That’s because, you can make 100x your money in 15 years with a 36% CAGR. Your 5 lakh will become 5 cr in 15 years (if you start at 27, by the time you are 42 – you are reasonably rich and an almost millionaire). This is not something that I picked up from the now famous 100-to-1 book. That never spoke of age. In fact, he talks very long time frames.
Is this the bull market in me speaking? Definitely. But why not? Look, unless you are outrageously lucky with a stock or timing the depth of a bear market, your BIG returns are going to come only in a bull market. Again, numbers. If a Rs. 20 has to become Rs. 100, you need a 400% return. That same Rs. 100 to come back to Rs. 20 requires just a 80% drop. So, you absolutely need to make killer returns in the bull market to survive the bear market.
People will try to dissaude you by quoting process will get corrupted, people will indulge in speculative stocks etc. My question is – what’s a corrupt process? Just because there is a wave of high quality, high management integrity bull market this time, everybody is on this bandwagon of the right process etc. It’s almost as if investing was just born in 2009.
And speculation. I don’t think speculation is going to net you 35-40% CAGR for 15 years. I have not met anybody yet doing this.
Is this easy? It’s obviously not meant to be easy. Just because you have some internet forums and whatsapp groups these days doesn’t mean investing is easy. There is a lot of hard work, there is a lot of luck and there is a lot of position sizing science involved before you make that million dollars. As Munger says, ‘It’s not meant to be easy. If you think it is easy, you are stupid’.
And speaking of Munger (which, in these days of the current bull market, seem to encapsulate all other Gurus), here’s what he had to say in Snowball – remember, when he was young –
So, for all those people who keep saying 18-20% CAGR, you are either already a millionaire or you are just bullshitting. Aim higher. Work harder. Enjoy the process of investing. And actually enjoy life at the right age. There is no fun in dying rich. And there is a tragedy in dying really rich without having enjoyed or doing what you really wanted to do.
Go for 35-40% CAGR (atleast). Become a millionaire. Live comfortably.
P.S – Cynical folks may obviously point out that 5 lakh is only a starting capital and people will add as and when they grow in life. You know, if people were so disciplined in investing, we’d have a lot more people active in 10 year and 15 year SIPs.
P.P.S – Other folks might point out CAGR is not important but how much, as a % of your networth, is more important to overall gains. Absolutely agree. Convince your friend in a bear market to put 90% of his networth in equities. % of networth is very important, but even with smaller sums of money (and I do think Rs. 5 lakh is a smaller amount of money these days, with freshers from IIMs earning Rs.20 lakh), CAGR at the right levels covers a lot of ground.