By Raymond Sia
As a child of the 1980s, I remember being amazed watching David Copperfield (commercially successful American staged magician and illusionist) making the Statue of Liberty vanish or walk through the Great Wall of China.
It was captivating precisely because we couldn’t see how it worked. The trick depended on our not knowing.
Money works the opposite way.
The less we understand it, the more it works against us. The more we understand it, the more it starts to look like “magic”; not because it’s hidden, but because the results feel almost too good to be explained by simple math.
Below are three “money magic” worth learning. Each one can build real wealth. Each one can just as easily destroy it too if one is not careful or discipline. The difference isn’t luck but it’s understanding.
1. The Magic of Saving and Compound Interest
A wise man once said money speaks only one language – “If you save me today, I will save you tomorrow.”
Compound interest is the closest thing banking & finance has to a magic trick that is proven and actually works.
Albert Einstein is often credited with calling compound interest the eighth wonder of the world; and whether or not he said it, the sentiment holds.
Money that earns a return, and then earns a return on that return, grows at an accelerating pace that defies our natural intuition.
The catch is that compounding is slow at first and dramatic later.
Someone who saves consistently starting at 25 years old will, almost without exception, end up wealthier at 60 years old than someone who saves twice as much starting at 40 years old.
Time does more work than the size of the contribution.
There is however a note of caution; “compounding effect” doesn’t care which direction it runs.
The same mathematics that quietly builds a retirement fund also quietly builds in debt. A debt/loan or debit balance carried at 10% interest compounds against us just as relentlessly as an investment compound for us.
Most people don’t fall behind financially because of one bad decision; they fall behind because compounding worked against them, unnoticed, for months and years.
2. The Magic of Leverage and Its Double-Edged Sword
Leverage (or gearing from a commercial banking perspective) lets us control something larger than our own capital would normally allow. A house bought with a mortgage, an equity / stock position bought on margin, a business scaled with borrowed bank borrowings. Used well and correctly, it accelerates outcomes that would otherwise take years or even decades.
But leverage doesn’t just amplify returns. It amplifies “decisions”; good ones and bad ones alike, with equal enthusiasm and impact without discrimination or differentiation.
A 10% gain on a leveraged position can feel like genius. A 10% loss on the same position can erase the entire investment, or worse, leave us owing more than we started with.
Leverage doesn’t improve our odds of being right; it raises the stakes of whichever way we turn out to be.
This is why professional traders spend more time thinking about position sizing and downside than about potential upside. The upside takes care of itself if the downside doesn’t wipe us out first.
3. The Magic of Financial Knowledge
Of the three “magical experiences”, this one is the most powerful despite it being the most intangible.
Financial knowledge doesn’t show up on a balance sheet. It doesn’t compound in a visible line on a chart. But it’s the one factor that determines whether the other two factors mentioned above work for us or against us. It’s the difference between someone who sees a leveraged opportunity and thinks “easy money,” versus someone who sees the same opportunity and asks, “what happens to me if this goes wrong?”
No one has ever suffered a financial loss due to knowledge. People (very) often suffer financial losses by the absence of it.
Epilogue
While I had used the metaphor of “magic”, none of the above three principles / points above are magic literally.
The principles are closer to physics than illusion; and they are consistent and impartial; and reward the people who understand and practices them.
That’s really the difference between David Copperfield’s magic and money’s magic.
An illusionist will depend on the audience not seeing how the trick worked.
Money’s magic work better the clearer we see how they work because once we do, they stop being tricks, and start being tools. Tools which we can all use and also derive the benefits.
Raymond Sia is the author of the “Right Angle – The Collection Volume One”. He currently serves as the Managing Director of Canadia Investment Holding Plc and Board Director for Canadia Bank and Credit Bureau Cambodia. Raymond doubts magic but believes in miracles. A strong advocate for financial literacy, he believes banks & bankers alike should practice Responsible Banking – a principle which he believes should apply equally to lending & deposit-gathering activities. The views expressed above are strictly the author’s personal opinion and do not represent the organizations & institutions he is attached with or represents.
