Warren Buffett’s wealth now stands at over $100bn. Yes, a lot of this is down to him being one of the best stock-pickers alive and betting big when he knew he’d found a good thing. However, there’s another factor that’s played a significant role in his success. It’s one I wish I’d known about sooner.
Warren Buffett’s words of wisdom
Buffett bought his first stock when he was 11 years old. Although barely making any money, undeterred, he continued to increase his investing knowledge and buy stocks. This precociousness helps explain why he amassed a fortune. It’s also why he once remarked that “a wise man once said invest young.” A quick bit of (simple) maths bears this out.
Let’s say I invested £1,000 in the stock market when I was 20 years old. Let’s also say I managed to achieve an annualised return of 10% (including any dividends). By the age of 60, I’d have a little over £45,000!
To be clear, this didn’t involve adding any additional funds over that 40-year period. It’s simply a great example of the power of compounding. All other things being equal, the outcome would be even better if I had invested more over time.
However, let’s say I didn’t get to invest that money until I was 30. By 60, I’d have a little under £17,500. If I waited until I was 40 (only giving me 20 years for the money to grow), I’d have even less. By my calculations, I’d have just $6,727.50 in my coffers.
Own the best stocks
Of course, this is all hypothetical. I’ve not deducted any costs associated with investing, such as broker fees. We also don’t know how the market will behave over a 40-year period. While equities have been shown to be the best asset class to own over time, that 10% annualised return could be quite a bit lower. Then again, it could be higher!
One way of increasing my chances of the latter is to only buy the best company stocks I can find at reasonable prices. This is essentially what Buffett did when he bought Coca-Cola in the 80s. He recognised the business was going through a temporary sticky patch and that its brand and competitive strengths would see it through.
As he predicted, Coca-Cola went on to recover and make him significantly rich(er). This isn’t to say I necessarily need to look abroad for quality compounders. Just look at the share price performance of UK quality stocks like Games Workshop over the last five years.
Not just for kids
There’s a possibility that some people may not embrace Buffett’s tip/belief for fear that they’re now too old. I respectfully disagree. As the last year has shown, stock markets have the potential to deliver great gains over a short period of time. So I suggest a slight modification to Buffett’s suggestion. A wise person starts investing as soon as they can.
This isn’t to say however, that a 60-year-old ‘me’ would necessarily buy the same things as a 20-year-old me. With far less time until retirement, it’s vital to match my investments to my risk tolerance.
With more years ahead of them, younger investors have the benefit of being able to recover from setbacks.