In Buddhism, …
…there’s a saying to the effect, …
…that as the sun rises, …
…the radiance of others stars, …
… to the observer’s eye, …
… pales, …
We’re not going to leave an observation like that hanging.
We’re going to extrude it.
When we make a well-managed underlying cost-free, …
…what are the implications, …
… on existing holdings, …
…which are not cost-free yet?
Well, over a large period of time, …
…their comparative impact on the folio…
…will start paling, … into insignificance.
Let’s say we hold x value of cost-free-ness in an underlying.
Rest of the folio’s value is y, with y = let’s say 30x.
Here’s one way go looking at it.
What’s the maximum loss you can incur on your y?
Not going to happen, but it’s 30x.
What’s the maximum gain that can occur on your cost-free holding?
At 15% per annum compounded, which is reasonable to expect for a well-managed company with many other tick-marks, if you hold your cost-free holding for 25 years, it’s value would be ~ 33x (= 1.15^25).
So, what have you done?
You’ve paled your other portion of the folio into “insignificance”, with just one created pocket of cost-free-ness.
Do ponder, what the implications would be, if you were to create a). 10 such pockets, or b). 20, or c). 50, or perhaps even d). 100 such pockets of cost-free-ness?
Can you even imagine where you would then be in 25 years?
a). With 10x of cost-free-ness, you would be at ~ 329x.
b). With 20x of cost-free-ness, you would be at ~ 658x.
c). With 50x of cost-free-ness, you would be at ~ 1645x.
d). With 100x of cost-free-ness, you would be at ~ 3292x.
Now substitute the value of x here.
Arbitrarily, let’s take x = 1.
Take what suits you.
See where you started from, and see where you’ve then come.
For example, starting with 1L of cost-free-ness, we land up at ~ 16.5 Cr in 25 years for 50 pockets.
Let’s say I have a target of creating 1 million worth of cost-free-ness in 50 pockets.
Where do I stand in 25 years?
At ~ 165 Cr (50 *1Million *1.15^25).
Alone the after tax dividend emerging from this stream would be > 2.5 Cr per annum.
🙂 (Happy Cost-free-ness!)