Numbers we love to hate

Number crunching is dreadful and numbers are dull, scary things for many of us. But listen carefully enough and they have stories to tell. Listen carefully and frequently enough and you might just fall in love with some of them.

But some numbers are daunting, unloved creatures nobody wants to know. Most of them live in Finance-vile. With names synonymous to gene sequences, complicated formulas, confusing meanings and different interpretations for different situations, how does one love such a whimsical thing?

Take CAGR for example. CAGR or Compound Annual Growth Rate is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.

Though CAGR is often used to compare returns of two investment options, it does not reflect investment risk. It also is a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. Such a performance can be unlikely.

Care however shall always be taken to understand the timeframe over which CAGR is being calculated. Owing to its mathematical formula, if CAGR is calculated for less than a year’s duration for any investment, CAGR numbers can be high and misleading. CAGR is reliable when it is calculated for a long enough duration.

So, do we love CAGR, or not?