The people who know me have often heard me say being a financial advisor is like being half computer and half armchair psychologist. On one hand, the computer in us needs to determine the optimal financial strategy, given a set of facts and circumstances. On the other, the psychologist in us also needs to convince you to execute the path that is best for you as well as keep you from making choices that could sabotage your financial future.
On the topic of psychology, I recently had the pleasure of reading Morgan Housel’s Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. While I recommend reading this book in its entirety, I’ve picked its most interesting story and poignant lesson to share with you:
More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful, but few pay enough attention to the simplest fact. Buffett’s fortune isn’t due to just being a good investor but being a good investor since he was literally a child. As I write this, Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 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 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 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 $1,000,000 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 would be, say $25,000. Let’s say he 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 $84.5 billion. $11.9 MILLION. 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 his geriatric years. His skill is investing, but his secret is time.
None of the 2,000 books picking apart Buffett success are titled This Guy Has Been Investing Consistently for Three-Quarters of a Century. But we know that’s the key to the majority of his success. It’s just hard to wrap your head around that math because it’s not intuitive.
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.
You can’t blame people for devoting all their effort to trying to earn the highest investment returns. It intuitively seems like the best way to get rich. But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.