Warren Buffett’s ‘secret’ to success is time, not excessive returns
- Warren Buffett is a veteran investor who is studied, analyzed, and emulated by many.
- But the “secret” of Buffett’s immense wealth is simply how long he’s invested, writes Morgan Housel in his new book, The Psychology of Money.
- Buffett isn’t the greatest investor of all time by average returns – but he’s had time and patience on his side.
- The billionaire is a fringe case, of course, but the power of compounding can create ample wealth for any investor willing to wait.
- With SmartAsset’s free tool, you can find a financial planner that can help you take control of your money. »
Warren Buffett is one of the richest people on the planet. People take his advice and endlessly analyze his investment decisions only to replicate even a fraction of his success.
However, according to Morgan Housel, author of the new book “The Psychology of Money”, there is one unmistakable driver of the legendary investor’s fortune that is technically accessible to everyone: time.
“In fact, all of Warren Buffett’s financial success has to do with the financial base he built during his adolescent years and the longevity he retained in his geriatric years,” writes Housel in his book. “His skill invests, but his secret is time.”
Years ago Buffett admitted this in an interview with motivational speaker Tony Robbins himself when Robbins asked how he got so rich: “Three things: Living in America for great opportunities, good genes so I’ve lived long, and compound interest . “”
Time gives way to compound growth
Buffett has been investing for eight decades. He started much earlier and of course lived longer than most of the others. However, the impact of time on investment – a phenomenon known as compound growth – is valuable at any level of wealth. This concept is less of a mystery and more elusive, says Housel.
“When something is put together – if a little growth serves as fuel for future growth – a small starting point can produce results so extraordinary that they seem to defy logic,” writes Housel. “It can be so logical,” he adds, “that you underestimate what is possible, where growth comes from and what it can lead to.”
Look at the table below. If you invest a lump sum and let it grow for 35 years, you will get remarkable results. As you add more money to these investments over the years, growth will accelerate. As you can see, time does a lot of the legwork.
And when you invest money at the level of someone like Buffett, the results become “ridiculous, impractical numbers,” writes Housel. This “exponential thinking” is not intuitive and often leads investors to achieve high returns as it is a more understandable strategy. High returns are nice, of course, but they’re hard to come by and they’re not the only way to build wealth, writes Housel.
Buffett is of course a marginal case. Few people will have the foresight to invest by the age of 10, or the biological makeup to live into their 80s or 90s. But nobody needs billions of dollars to live comfortably. The power of compounding can create sufficient wealth for any investor willing to wait.
Tanza Loudenback, CFP®, is the personal finance correspondent for Business Insider. She writes most frequently on saving money, retirement planning, taxes, debt management, and strategies for building wealth. Do you have a money question for Tanza? Fill out this anonymous form.
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