Overlooked Fact About Buffett’s Fortune

Overlooked Fact About Buffett’s Fortune

A recent CNBC article offers an excerpt from Morgan Housel’s new book, “The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness” in which he underscores the importance of compounding using the example of Warren Buffett’s legendary accumulation of wealth (a net worth of $81 billion).

“Those who attach all of Buffett’s success to investing acumen miss an important point,” Housel writes. “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.”

Housel explains that Buffett isn’t necessarily the greatest investor, as measured by average annual returns, noting that Renaissance Technologies founder Jim Simons tops that category with average annual returns of 66% since 1988. But Housel notes that Simons’ net worth is about $23 billion versus Buffett’s $81 billion. The difference, Housel explains, comes down to fewer years of compounding.

“That’s how compounding works,” Housel argues, quipping that the most powerful book on investing would be titled, “Shut Up and Wait” and would consist of one page with a “long-term chart of economic growth.”

Good investing, Housel writes, “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.”