"We don't need tremendous force to create tremendous results"
In 2020 Warren Buffett’s net worth was $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came in his mid-60s.
Warren Buffett is a phenomenal investor. However, we miss a key point if we attach all of his success to investing acumen. The key is that he’s been a phenomenal investor for three-quarters of a century. Few people would have ever heard of him if he started investing in his 30s and retired in his 60s.
“This Guy Has Been Investing Consistently for Three-Quarters of a Century”
Consider a little thought experiment.
Buffett began serious investing when he was 10 years old. By the time he was 30, he had a net worth of $9.3 million adjusted for inflation. What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000?
And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60.
What would a rough estimate of his net worth be today?
Not $84.5 billion.
but $11.9 million.
99.9% less than his actual net worth.
His skill is investing, but his secret is time. That’s how compounding works.
Think of this another way. Buffet is the richest investor of all time but he is not the greatest —at least not when measured by average annual returns.
Jim Simons has compounded money at 66% annually since 1988. No one comes close to this record. As we just saw, Buffett has compounded at roughly 22% annually, a third as much.
Simons’ net worth, is $21 billion. He is 75% less rich than Buffett.
Why the difference, if Simons is such a better investor? Because Simons did not find his investment stride until he was 50 years old. He’s had less than half as many years to compound as Buffett.
If James Simons had earned his 66% annual returns for the 70-year span Buffett has built his wealth he would be worth- 69,900,781,780,748,160,000$
The point is that what seems like small changes in growth assumptions can lead to ridiculous, impractical numbers.
Linear thinking is so much more intuitive/direct than exponential thinking. If we calculate 8+8+8+8+8+8+8+8+8 in our head, we can do it in a few seconds (it’s 72). but if we calculate 8×8×8×8×8×8×8×8×8, our head will ughh… btw (it’s 134,217,728).
“It’s just hard to wrap our head around that math because it’s not direct”
The danger here is that when compounding isn’t direct we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.
There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.
Long-term planning is harder than it seems because people’s goals and desires change over time.
Many of us wind through life on a similar trajectory. Only 27% of college grads have a job related to their major, according to the Federal Reserve. Twenty-nine per cent of stay-at-home parents have a college.
But there are two things to keep in mind when making what we think are long-term decisions.
We should avoid the extreme ends of financial planning.
We should also come to accept the reality of changing our minds.
The trick is to accept the reality of change and move on as soon as possible.
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