The Not-So-Secret Sauce In Investing

The Not-So-Secret Sauce In Investing

A genius is the man who can do the average thing when all those around him are going crazy.

- Napoleon

The Oracle of Omaha has been called many things in his long life, but the most common adjective used to describe Warren Buffett is probably ‘genius’.

And who can argue with that?

Buffett is arguably the most successful investor of all time with a net worth of 80+ billion, making him the world’s fourth-richest person — although given how volatile stocks have been, this seems to change every day. However, if you were to ask the main man himself about his ‘genius’ investment strategy, he’d probably refer back to one of his own famous quotes:

You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.

In fact, one of the biggest misconceptions about investing may be that only those with a considerably high IQ can pick out the successful stocks and earn big money through investing.

In reality, intelligence might be one of the least foretelling factors of investment success. You don’t need to be a genius to follow Warren’s investment strategy and philosophy. You don’t need to time the market perfectly every day, watch for all the tell-tale signs, consult the tea leaves, or even phone up Mystic Meg. All it takes is common sense, the ability to follow directions, and most important of all:


Time ends all things… Except for compound interest

Yes, you’ve heard it all before regarding compound interest, from Einstein’s famous quotes to the fun calculators that show you just how rich you’d be if you consistently invested.

Surprisingly though, all of that advice and all the anecdotes are usually true.

Morgan Housel uses the perfect metaphor for the power of compounding in his recent book, ‘The Psychology of Money’ — I know we mention it a lot, but we promise we are not endorsing it, it’s just a great read.

When talking about compounding, Housel likens it to our understanding of the ice ages that plagued earth at least 5 times over the millennia. 20th-century scientists uncovered that it was not a series of freezing winters that covered the world in ice, but rather consistently cool summers which failed to melt the ice from the previous winter.

What begins as a relatively thin layer of ice and snow, when left untouched, continues to grow as layer after layer is added year after year. This, in essence, is compounding.

More than 2000 books are dedicated to Warren Buffett, but not one of them focuses solely on the key ingredient to his success — you already know where this is going:


For almost three-quarters of a century, the Oracle of Omaha has been investing, not selling (leaving stocks untouched like the ice age snow), adding to them, reinvesting the dividend back into them so that he developed returns on his returns. And so on.

This is the simplicity of it. Warren Buffett is an incredible investor, and to put his success simply down to time would be an injustice to the great man himself, but there is no denying the role that time and patience has played in generating his wealth. Starting at just 10 years old, if Buffett had decided to stop investing at the age of 60, and hit the links for an early retirement, he would ‘only’ have been worth $11.9 million.

That’s 99.9% less than his current actual net worth, 30 years on.

Effectively, the vast majority of Buffett’s financial success can be attributed to the strong base developed in his youth and the longevity developed in his later life.

Of course, not everyone is Warren Buffett, but the man himself is not even considered the most successful investor of all time by annual returns, just the wealthiest. That honor must go to Rennaissance Technologies head, Jim Simons, who has boasted untouchable annual returns of 66% since 1988. The problem is that he began investing substantially in his 50’s, and despite enjoying annual returns that are 44% better than Buffett’s, he is worth roughly $60 billion less than the Oracle of Omaha, purely because he began investing later in life than Warren, meaning he didn’t have half the time to enjoy compounding.

So, as my colleague Mike recently wrote: Investing is simple, but not easy. Time is the greatest weapon in an investors’ arsenal when paired with patience. Invest in what you believe in, hold it forever, reinvest the dividends, and reap the rewards.

With that in mind, I’ll leave you with a simple head-scratcher:

Would you rather have a penny that doubles each day for a month, or $1 million?

You can tweet us your answers at @MyWallStHQ.


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