Arguably the most important financial article ever published hit the Bankers Anonymous website last week. Unfortunately it was drowned out by matters such as the European debt crisis, the in-vogue “Currency Wars”, the looming budget cuts in the US and to a lesser degree Oscar Pistorius.
The article was written by an unnamed ex-Goldman Sachs banker under the title: The Most Powerful Math in the Universe Goes Untaught. In it, he argues that 95% of the college-level students he will be teaching have absolutely no idea how compound interest works and why they should understand a discounted cash flow (DCF) model.
“What I’m trying to get across to these undergraduates is that all of the key financial choices they will make in their lives – all of their future decisions about consumer debt, retirement, insurance, purchasing a home, tax preparation, and investing – will be much, much better decisions if they deeply understand compound interest and discounted cash flows.”
Why does the anonymous banker say that these concepts matter? Well, the compound interest formula tells students how quickly (and to what size) money can grow in the future while a DCF tells you the reverse: what the present value would be of any given cash flow or series of cash flows that occur in the future.
We here at Finweek would, however, point out that while Goldman Sachs bankers are normally quite a smart bunch of people, we notice they leave out a third, quite important concept – inflation. Yes, that pesky concept that fuelled ever bigger performance or “lifestyle” bonuses in global banking circles..........