I want to tell you a little story to illustrate how to make millions with small amount of capital.
One Grain of Rice
Long ago, there lived a king who believed he was wise and fair, as a king should be. The people in his province were rice farmers. The king decreed that everyone must give nearly all of their rice to him. “I will store the rice safely,” the king promised the people, “so that in time of famine, everyone will have rice to eat, and no one will go hungry.” Each year, the king’s rice collectors gathered nearly all of the people’s rice and carried it away to the royal storehouses.
For many years, the rice grew well. The people gave nearly all of their rice to the king, and the storehouses were always full. But the people were left with only enough rice to get by. Then one year the rice grew badly and there was famine and hunger. The people had no rice to give to the king, and they had no rice to eat. The king’s ministers implored him, “Your highness, let us open the royal storehouses and give the rice to the people, as you promised.” “No!” cried the king. How do I know how long the famine will last? I must have the rice for myself. Promise or no promise, a king must not go hungry!”
Time went on, and the people grew more and more hungry. But the king would not give out the rice. One day, the king ordered a feast for himself . A servant led an elephant from a royal storehouse to the palace, carrying two full baskets of rice. A village girl saw that a trickle of rice was falling from one of the baskets. Quickly she jumped up and walked along beside the elephant, catching the falling rice in her skirt. She was clever, and she began to make a plan.
At the palace, a guard cried, “Halt, theif! Where are you going with that rice?”
“I am not a thief,” she replied. “This rice fell from one of the baskets, and I am returning it now to the king.”
When the king heard about the village girl’s good deed, he asked his ministers to bring her before him.
“I wish to reward you for returning what belongs to me,” the king said to her. “Ask me for anything, and you shall have it.”
“Your highness,” she said, “I do not deserve any reward at all. But if you wish, you may give me one grain of rice.”
“Only one grain of rice?” exclaimed the king. “Surely you will allow me to reward you more plentifully, as a king should.”
“Very well,” she said. “If it pleased Your Highness, you may reward me in this way. Today, you will give me a single grain of rice. Then, each day for thirty days you will give me double the rice you gave me the day before. Thus, tomorrow you will give me two grains of rice, the next day four grains of rice, and so on for thirty day.”
“This seems to be a modest reward,” said the king. “But you shall have it.”
And she was presented with a single grain of rice.
The next day, she was presented with two grains of rice.
And the following day, she was presented with four grains of rice.
On the ninth day, she was presented with 256 grains of rice, enough for only a small handful. “This girl is honest, but not very clever,” thought the king. “She would have gained more rice by keeping what fell into her skirt!”
On the twelfth day, she received 2048 grains of rice, about four handfuls.
On the thirteenth day, she received 4096 grains of rice, enough to fill a bowl.
On the sixteenth day, she was presented with a bag containing 32768 grains of rice. All together she had enough rice for two bags. “This doubling up adds up to more rice than I expected” thought the king. “But surely her reward won’t amount to much more.”
On the thirtieth and final day – Five hundred and thirty-six million, eight hundred and seventy thousand, nine hundred and twelve grains of rice.
All together, she had received more than one billion grains of rice. The king had no more rice to give. “And what will you do with this rice,” said the king with a sigh, “now that I have none?”
“I shall give it to all the hungry people,” she said, “and I shall leave a basket of rice for you, too, if you promise from now on to take only as much rice as you need.”
“I promise,” said the king. And for the rest of his days, the king was truly wise and fair, as a king should be.
I think that this is a great story and I hope you understand the relevance to financial trading and investing.
Let me tell you how $5,000 could have turned into one million dollars ($100,000 dollars) over 5 years.
I am changing figures here to make the maths simple, but basically from 2008 to mid 2013 the Dow index went up from 7,000 to 15,500 (8,500 points).
Now if you had opened an account and placed $5,000 margin and traded $25 a point that the market would go up and just left it at $25 flat you would have made $212,500 ($25 X 8500 points=$212,500) not bad right, but what if you had used the grain of rice principle.
$25 X 2,000 points= $50,000
$50 X 2,000 points = $100,000
$100 X 2,000 points= $200,000
$200 X 2,000 points= $400,000
$200 X 2,000 points= $400,000
All together, You would have made $1,150,000 (one million one hundred and fifty thousand dollars). so you can see how the grain of rice story works in financial markets.
Even with the ups and downs you would have always had enough margin to cover your trade. Even if you took some money out of your account you would always have a one million positive balance.
The next thing you should know is the COMPOUNDING (this approach works far better than anything else I have seen). The point is that compound interest is a millionaire’s best friend.
The Power of Compounding – The road to riches.
Q. What, exactly, does it take to become a millionaire? (answer on bottom)
What makes compound interest so fantastic is the way it grows. Lets start with $10,000.
You would be taking your 5% profits and reinvesting the profits along with the initial investment ($10,000) each week for 1 year (52 weeks).
$10,000 at 5% For 1 year (52 Weeks)
$120,418 in one year, that’s the magic of compounding.
Ok, let’s go one step further. Say you continue with this compounding technique for another 1 year (52 weeks)
$10,000 at 5% for the 2nd year
By continuing the process we now have a grand total of 1.5 million in 2 years!
In case you just might be wondering what would happen if you continue with this for another 1 year. You would now have a total of 19.2 million.
The secret to making money in the Financial Markets or in fact any other business is compounding, The power of compounded interest is great, but there is a catch – what about losses?
In any circumstances you should not allow negative compounding i.e) allowing loss of more than 10% to 20% of invested capital on one trade. You should always have clear targets where to sell if the stock moves against you.
Let’s see why you should NOT allow negative compounding loss of more than 10% to 20% of invested capital on one trade.
For example your starting capital in your trading account is $10,000. After a month, you lose $1,000, and your loss is 10%. If you lose another $2,000, then your loss will be 30%. To recover the loss percentage ,you will have to profit much higher to make back to the original position of your trading account .
For the first 10% loss, your remaining capital will be $9,000. In order for you to go back to the original position which is $10,000, you’ll have to make a $1,000 profit from the remaining $9,000 capital . Your profit recovery is $1,000 ÷ $9,000 x 100 = 11.11%.
If you are loss by 20%, you need a profit of 25% to recover. For a 50% loss, a 100% recovery is required. The higher is your loss, the more difficult it is to recover your capital.
Loss and Profit Recovery
% Loss of Capital % Profit to Recover
Understand that it is essential to not let losing trades run and run because than the compounding effect is against you.
Remember: The Negative Compounding Kills.
So, the answer to what exactly does it take to become a millionaire? is if you use the power of compounding with the right trading strategy and protect losses (negative compounding) then the seven figures is pretty cool.