Congratulations on officially becoming an adult now. I know how relieved you would be feeling having completed your school education – which in any case, you did not like very much.
Before you start wondering who I am, let me introduce myself. I am your future self – 12 years in the future to be exact. No don’t worry. I don’t have a terminator-like mission to protect you or something. And I am just future-you, writing this letter to you while sipping a hot cup of coffee at 12 midnight.
I don’t know what you will do in future – may be you will do your engineering, work for some energy company, do a MBA, then work for a bank, etc. – I don’t know. But to be honest, I actually know it. But let life surprise you. I am not telling you.
But one thing, which I do know is that you really like getting involved in managing money and helping others, do it. It sounds ridiculous to take advice and listen to an 18-year old. But I don’t know why my (our) parents and others do it.
I know you don’t want to listen to all this but there is one important thing which I want you to know. I am sure you know it theoretically – you were pretty good in mathematics. But what you do not know is how it can impact your future financial life. And I want to tell you all this because you have recently started dabbling in stock markets. Luckily our parents have been very supportive of you doing it. But there will be many others, who will tell you that it’s a place where you will only loose money. My advice: Ignore them. They are all full of noise Dev. Just ignore them.
Stock market is the place, where if you are diligent in your groundwork and have a sensible head that has the ability to cut down noise, then you can make truckloads of money. But when I say cut the noise, I also mean that you need to find sensible people to listen to. And you don’t necessarily need to meet those people. Many of them are already dead. But you can read what you they have already written. So get those books. Don’t wait too much. Read those books even if you don’t understand them completely. Because the next time you read it, you will understand it a little more.
But lets not waste more time. I know your friends are waiting for you to join them for a bike ride. 🙂
So Dev, when I said that you know the mathematical concept, I was referring to the concept of compounding. I know you know it and how the calculations are done. But before you run away, listen to me.
Do you know how much returns can stock markets give? Great investors can manage above 20% for decades. But we are not great like them. So lets be sensible and pick a number that is much lower. Lets take 15%. Now the next two statements will tell you what I really wanted you to know.
If you can just invest Rs 5000 a month for next 12 years, then do you know how much you will have when you reach my age? More than Rs 20 lacs Dev!
You might say that Rs 20 lacs may not be a big amount after 12 years. But I know it Dev. It is a big amount. And it is still better than having nothing at all. Isn’t it?
And just think about it. Isn’t it a big number to achieve considering you only have to put aside a small amount of Rs 5000 every month? I know. Initially it might seem tough to find that amount of money. But as you age and start earning yourself, you will find that it is not tough.
And you know what? You can earn much more than 20 lacs if you can just increase your monthly investment amount every year!! You might even be able to save 35-40 lacs!! Sounds awesome. Great! It will feel much awesome(r) when you have that amount when you turn 30. I can swear that. I should have done it myself when I was at your age. But I had no one to tell me all this. But please don’t repeat my mistake of underestimating the power of investing small amounts. It can cost you a lot when you grow older.
You might feel that you can make a lot more money by investing directly in stocks. Yes you can. And I am not saying that you don’t invest in stocks. Do it. It’s a good learning exercise. But at the core of your investment philosophy (which you should have in place by the time you are 30), should be to invest as much as possible every month through mutual funds. And if you do recognize a good, sustainable, business that is selling at sensible valuations, go and buy truckloads of its shares? If you can’t buy truckloads of it, accumulate it slowly and steadily till the valuation remain reasonable and business remains attractive and growing.
I know I am using big words like ‘valuations’, ‘sustainable’, etc., which you might not understand completely at the age of 18.
But don’t worry.
Just focus on Compounding. And go and do a Google search for what Einstein (your childhood Physics hero) had to say about Compounding (link). Yes Dev. Even he knew what compounding could do.
But this is getting really long now. And I better get some sleep now. Have finished my coffee long time back. And my wife has already called me twice. Another advice Dev – Always respond to your wife before she needs to tell you something for the third time. 🙂
But jokes apart, future is always bright. It is what we should atleast choose to believe. In life as well as in investing. You are just entering the most exciting phase of your life Dev. And remember that though its good to have money (which I am sure you will make using the concept of compounding), it is not the most important thing. I will not tell you what is the most important thing. You will figure it out yourself in next few years.
All I can tell you is that you will meet some amazing people in next 12 years. Some in person, and more of them in books you are going to read. So keep a sane head. Never let your ego do the thinking part for you. Brains have the responsibility of doing it. Stay calm and be stable. This reminds me of something Dev. The word ‘Stable’ will mean a lot to you in years to come. No. I can’t tell you anything more than that.
Now go and get hold of your friends for that bike ride.