Warren Buffet is regarded as one of the most successful investors of our time. With more than 2,000 books dedicated to how he built his fortune, there’s no shortage of theories and explanations for his success, but very few understand his true secret.
In Morgan Housel’s book The Psychology of Money, Housel sheds light on a straightforward yet powerful explanation for Buffett’s success.
Housel writes:
“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.”
Housel goes on to explain:
“Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real reason for his success is that he’s been a phenomenal investor for three-quarters of a century.”
Warren Buffett started making investments when he was just ten years old. A millionaire by age 30—$9.3 million adjusted for inflation—Buffett was well on his way to an incredible investing career. Buffett was able to get an amazing head start, and then he just continued going, never looking back.
To drive the point home, Housel takes us through a thought experiment.
What do you think Buffett’s net worth would be today if he had been more of a “normal person”—spending his teens and 20’s traveling or exploring the world rather than investing?
In this example, assume that Buffett had a net worth of $25,000 when he was 30.
Let’s assume Buffett was able to generate the same outstanding returns throughout his career—22% annually—but at age 60, he decided to retire early rather than continue investing.
The results are staggering.
Rather than the $84.5 billion net worth Buffett has today, he would have $11.9 million. That’s 99.9% less. That shows the power of time and compound interest —Buffett’s true secret to investing success.
Armed with this secret, there are a number of ways that investors can weave this into their own financial plan and apply this knowledge. Here are a few tips to remember:
1. Start investing early. There aren’t many people that start investing at ten years old, and that’s ok—but the earlier, the better. No matter your age, the best time to start was yesterday, but the second-best time is today. This can be valuable advice for the young people in your life. By helping your children or grandchildren understand the value of investing young, you can set them on the path to financial freedom at an early age.
2. Let compounding do its work. Charlie Munger said it best: “The first rule of compounding is to never interrupt it unnecessarily.” Too often, investors interrupt compounding by jumping in and out of markets while attempting to boost their returns. This is why it can be valuable to have a written investment plan that guides your investment decisions rather than reacting emotionally to the inevitable market fluctuations.
3. Compounding takes time. One of the keys to successful investing is beginning with a long-term mindset. Often, investors find themselves suffering steep losses because they were too focused on short-term bets that didn’t pan out. Compounding is incredibly consistent and reliable, but it takes time. If you’re able to maintain a long-term mindset and let the money work for you, you will be rewarded in the end. Remember that 96% of Warren Buffett’s wealth came after the age of 65.
TrueNorth Wealth is Here to Help
If you’re interested in working with a trusted financial advisor that can help guide you through the world of compound interest and investing, then we’re here to help.
At TrueNorth Wealth, one of Salt Lake City’s top wealth management firms, our team focuses on helping clients build long-term financial security while maximizing the benefits they receive from their assets. We do this by matching our customers with a dedicated CFP® professional backed by an incredible team of fee-only financial advisors. We realize it can be very challenging to maintain a long-term investment mindset, which is why we assist our clients understand the bigger picture and the impact of each financial decision.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families in Salt Lake City, Logan, St. George, and all across Utah. Our fee-only financial planners will help them achieve true freedom and flexibility in their lives. To learn more about investing or schedule a no-cost consultation, visit our website at TrueNorth Wealth or call (801) 316-1875.
