Articles Archive for August 2008

The magic of compound interest

9 August 2008 Michael Szumielewski 154 Comments Investing

Compound interest is one of the most interesting things in the financial world. If you truly understand how it works, it can make you a lot of money. Check out this impressive quote:

Compound interest is the greatest mathematical discovery of all time.
Albert Einstein

Compound interest can be explained as the adding of accumulated interest back to the principal. Interest is earned on interest. Compounding depends on three factors: percentage, basis and time.
Example: You have a bank account with $10000 in it and get 4% interest per year. After the first year you have $10400, but ten years later you already have $14802.44. Sounds great, doesn’t it?

Even 0.5% make a difference

Let’s take the example from above and modify the percentage to 4.5%. After ten years you have $15529.69. That means that you get 10.77% more than with a percentage of 4%. Amazing. Always seek for that extra 0.1% to 0.5% when searching for a good investment. Over time it changes a lot and you will see the difference.

The more you have, the more you will get

It’s true, rich people get richer. We earn $400 in our first example, but with a basis of $20000 we would have earned $800. The higher the basis, the higher the profits. Don’t forget to make regular payments into your savings account, so your basis gets bigger. Ideally you save money for a reason, for example your retirement. Then you need the endurance letting the money where it is for let’s say 20 years. But trust me, the motivation is great to pay in every month, because you will see amazing results and retire completely without financial problems.

Time is on your side

How long you let your money earn money is up to you, but the longer the better.
Remember, you earn money by doing nothing. And the money you earned by letting it earn more money will earn you even more money. You just put money in your account and watch it grow over time. If you don’t need the money, let it multiply. Be disciplined and patient enough and don’t touch this money.

The three factors have to work together

The whole concept of compound interest sounds great, but it is dependent on the three factors. They have to work together well, or you will get poor results. Basically, it is up to you how long you can do without the money you put in your account. It is also your choice how much you put in,dependent on how much money you have, of course. To get the max, the basis and time should be relative high, because the third factor “percentage” is aligned with risk. You get a small percentage with little to no risk but every percentage point more goes hand in hand with more risk. It is essential to find the right balance.

Sometimes it is magic

To conclude this article, here is a amazing example on compound interest at work:
“If the Native American tribe that accepted goods worth 60 guilders for the sale of Manhattan in 1626 had invested the money in a Dutch bank at 6.5% interest, compounded annually, then in 2005 their investment would be worth over €700 billion (around USD $1,000 billion), more than the assessed value of the real estate in all five boroughs of New York City. With a 6.0% interest however, the value of their investment today would have been €100 billion (7 times less!).”

Sources: Wikipedia

The Robotalisation – a theory of a new economic revolution

1 August 2008 Sören Zschoche 3 Comments Economy

In the late 18th century our economy has changed, modern machines were rolled out, the division of labour was founded and the people started to work in big factories where they were specialised on different work steps. We called this process industrialization and it changed the way we worked and lived in many ways. Now, nearly 300 years later, we are facing a new revolution which sadly hasn’t got a name yet, so I fell so free to call it “robotalisation” temporary.

I want to introduce you to this post with a law of the famous computer scientist Gordon Moore which says that computer systems are doubling their performance every 18 months, so if we keep on doubling our computer performance at this rate we could theoretically be able to create humanoid artificial intelligence within the coming 30 – 50 years. That’s philosophically speaking – but it’s a fact that there are already dozens of wise folks in many universities and companies today who are doing research on artificial intelligence and new robotic technologies.

But what happens if the artificial intelligence of the machines is developed so far that it could replace the humans? A famous economist once called this situation a paradox and explained this way: if somebody in a cinema stands up he has an advantage because he sees better; but if everybody stands up everybody sees worse. So if one businessman replaces his workers by machines, he will surely have an advantage, but if everybody does it, everybody will have a disadvantage because the businessmen can’t sell their products anymore or rather the people don’t have the money to buy the products because they’re unemployed. The shear between the poor and the rich people would separate enormously and our economic system would not work anymore.

That would be the worst case. But as the old Chinese philosophy yin yang once told us that every shadow also has a sun, there is an enormous potential in this technology, a potential which could not just change our economy but could change the way we live on this earth and how we treat each other and our planet. Theoretically, we got the chance to create a world where everybody has access to all tangible values. A world without poverty, ecological destruction and wars. A world where people are free to decide what to do with their lives. But that’s just a dream, fact is that we have to find a new economic system, a system which is based on brain work and intellectual property.

Also we should not ignore this process because there are already thousands of industrial robots worldwide working in factories at the same assembly lines where the industrial revolution began 200 years ago and where humans worked 50 years ago. So in my opinion the robotalisation has already started by now. After the assembly line workers many jobs of the service sector will follow geriatric nurses, cashiers, charwoman… – all jobs which could possibly be replaced by robots within the next decades.