Grain of Rice Into a Kingdom
Our investment philosophy is simple, and we believe it is portrayed well by the following narrative:
There once was a King who loved to play chess. One day he invited a wise businessman to his court for a game, and the businessman won. The king was impressed with his performance, so the king offered the man a large sum of money as a reward. The businessman countered the offer with what seemed to be a strange but simple request; a single grain of rice would be placed on the first square of the chessboard, and that on each proceeding square the quantity of rice would double, and continue doubling for the length of board. The king thought nothing of it, certainly a modest request compared to the original offer he had proposed, so he readily agreed. A chessboard has 64 squares, so the amount of rice quickly escalated…. the progression is as follows:
On the first square, there would be one grain of rice.
On the second square, there would be two.
On the third square, there would be four.
This doubling continues for all 64 squares. While the numbers seem manageable for the first few squares, it quickly becomes apparent that that is far from the truth. By the 64th square, you'd have a staggering 18,446,744,073,709,551,615 grains of rice. That's over 18 quintillion grains.
To put that in perspective:
The amount of rice would weigh 60x more than the earth.
It would take you 584 billion years to count each grain.
The initial single grain of rice seems so insignificant, illustrated in step (1) - (3). However, as you move up board, the number of grains rapidly grows in a way that is impossible to comprehend.
This fable illustrates what we at Granite Street believe to be the most important phenomenon in investing, something that the late Mark Twain called “the 8th wonder of the world”: compound interest. Compound interest is the primary driver of investment returns, particularly in the lending business. Coupon payments from loans, bonds, or dividends, reinvested back into similar investments may seem insignificant in the short run, but over the course of an investing career, it is what we see as the primary driver of wealth creation. Our primary objective as private money lenders is to preserve our initial capital (win the chess game to begin with, and subsequently earn the initial grain of rice), to use our capital to earn interest payments (the initially stages of the “doubling of the rice”), and to further reinvest those interest payments into new loans for years to come (an inconceivable growth).
