Posted by John Posey
Have you ever thought about what factors produce significant investment success? I know a lot of us seem to be immediately drawn to the idea that some must just have the magic touch, the innate ability to time markets or select the best investments. Warren Buffett is often viewed as synonymous with this idea. And often enough that’s the idea some investment advisors like to sell – something like, “I only pick winners kid so stick with me. We can outperform!” It’s the ultimate promise that works out, you know…until it doesn’t. Sometimes we think it must just be a matter of trying harder than everyone else but check out my Effort Doesn’t Equal Alpha article or the Financial Freedom Field Guide to dispel that notion.
New York Times author and financial planner, Carl Richards, recently shared the following excerpt in his email newsletter (behaviorgap.com) from Morgan Housel’s new book, The Psychology of Money: Timeless lessons on wealth, greed, and happiness. And just to relay 100% transparency, I have no horse in the race. I receive no incentive to mention this book or anything related thereof. I just think it’s valuable and insightful information that may be helpful to others. I thought this was a profound perspective and it highlights what often gets overlooked when we see others’ financial success from the outside.
As I write this Warren Buffett’s net worth is $80 billion. Of that, $19.7 billion was accumulated after his 50th birthday. $70 billion came after he qualified for Social Security, in his mid-60s.
Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.
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 $1 million, or $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 to play golf and spend time with his grandkids.
What would a rough estimate of his net worth be today?
Not $80 billion.
99.9% less than his actual net worth.
Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years.
His skill is investing, but his secret is time.
That’s how compounding works.
Now I believe investing acumen has something to do with the level of success an investor achieves, but I think after considering the following example it’s easy to see how it can become the overriding focus and fascination. So what’s the moral of the story? Time will likely be the most significant contributing factor in accumulating wealth and everything else stands to be secondary. The effect of compounding is your friend and you’d be wise to recognize it if accumulating wealth and achieving more financial freedom is important to you. Discipline and investing knowledge are definitely part of the equation in realizing good investment outcomes but sheer time can dramatically tip the scale in your favor.
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