Do you know Warren buffet made $19.4 billion before his 50th birthday and $70 billion after that. So, Want to know why there is huge net worth gap before and after his 50th birthday. For that you need to watch this video till the end.
Look, Everyone thinks Warren buffet is a smart investor. And whenever you search about how he made his billions lot of people will spam you with answer as he is intelligent. He has got that finance IQ. He is using those fancy parameters to judge companies and when those parameters indicate to buy, he buys. And to be honest in reality, Some fools even market those parameters as magical factors. But, today in this video I am going to tell you that secret of warren buffet that everyone tends to ignore or according to me it is shadowed by that parameter theory. Or may be in other universe that secret is quite boring and because of that everyone is ignoring it.
And that secret is compound interest. Right? Look as of now warren buffet’s net worth is moving around $80 billion. And you already know majority of his net worth came after his 50th birthday. That is after he qualified for Social Security, in his mid-60s. No doubt that he is a phenomenal investor but you are mis-judging him if you connect all of his success to his investing skills.
If you carefully analyze his carrier you will realize that the real key to his success is that he’s been a phenomenal investor for three quarters of a century. Let’s imagine Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.
For the sake of serious understanding Let’s do a quick math here.
Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or in 2020 its $9.3 million after adjusting 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 was, say, $25,000?
And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate that is (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? I would recommend you to pause this video and comment in your estimate.
Obviously Not $80 billion. $11.9 million.99.9% less than his actual net worth.
From the above discussion it is clear that his skill is investing but secret to his mega wealth is TIME. And that is why I am a huge fan of the compounding effect. It’s one of the most powerful forces in the universe and One of the best things you can do in your life and is to understand the logic of compound which is the exponential increase in the value of an asset over time. And if you want to experience magic of compounding effect then think of small action you can do on daily basis and do it without interruption. Over the period of time you will start noticing small change in particular area you are trying to improve in.
In other words, a small action repeated over time can make a huge difference in your life, career, relationship and finance. Even if you don’t trust me, I am sure you will agree with Albert Einstein, who once said, “compound interest is the eight secret of the world. And one who understands it earns it and who doesn’t pay for it. Obviously in the form of loan interest or taxes. Buffet did the same thing decades ago. He said I know I am going to become rich but I am not in hurry. This sentence clearly indicates he was talking about power of compound interest. Most of the people wants thing faster. They want radical change in their life. Real growth and progress don’t work like that. It takes time, patience and consistency. Buffet was so patient that he has been stressing the importance of compounding for over six decades — it’s made him billions. In one interview buffet said,’ Only buy something that you would be happy to hold even if market shut down for 10 years.” This shows his patience level. Coca cola stock is the best example for this discussion.
Coca-Cola compounded investor wealth at over 14% a year (including dividends) over the last 30 years. Coca-Cola was the largest soda brand in the United States in 1990… And had a 98-year operating history at the time. And important thing is It was not a start-up.
After splits and dividends, Coca-Cola stock ended at a share price of $1.03 per share in 1989. The stock closed at $53.86 per share on December 31st, 2019. That means the stock generated annualized returns of 14.1% per year over the 30-year period from 1990-2019. According to CNBC, if you would have invested $1000 in Coca-Cola in 2009 could have become $2600 in 2020. And in the same way $1000 in PepsiCo would have earned you $3000 in 2020.
You may see that amount is really low. Remember your returns depends on how much do you invest at certain point of time. So, you replace $1000 with $1 million you will get return amount as $2.6 million. And in same way if you replace $1 million with $1 billion you will get 2.6 billion dollars. And look warren buffet is investing in billions so he gets lot of return out of that.
But, hey lot of people already know about this. You may think Did we just click this video for this? Answer is you are going to learn compound interest in its purest form. There is secret and simple logic hidden behind use of compound interest. But of course, you need to analyse it very carefully. Whenever people think about Compound Interest. Let’s say with ci = 5:
Year 1: Amount Invested: $100 Amount after Interest: $105
Year 2: Amount: $105 Amount after interest: $110.25
That means your principle amount is increasing over the period of time.
But, buffet used it in its natural form for amassing huge wealth.
Now, what does this even mean?
You must be knowing warren buffet writes letter to shareholders. And according to one of that letters, there is around 20% return on average, compounded, per year on investments. 20% does not sound much. But when compounded over 60 years, it brought him from a few million dollars to top 10 richest person on the planet.
Mostly this is because when you invest in stock, you don’t pay capital gain tax until the year you sell the stock. So, if you never sell it, you never have to pay tax on it. Yes, this what compounding mean for buffet. By this time you have understood that compounding increases asset exponentially and saves your tax in stock market. Bet example for this is Jim Simons, founder of the hedge fund Renaissance Technologies, has compounded money at 66% annually since 1988. No one comes close to this record. As we just saw, Buffett has compounded at roughly 20% annually, a third as much. Simons’ net worth, is around $23 billion. He is 72% less rich than Buffett. Why the difference, if Simons is such a better investor? Because Simons did not find his investment stride until he was 50 years old. He has had less than half as many years to compound as Buffett.
I’ve heard many people say that the first time they saw a compound interest table (or one of those stories about how much more you’d have for retirement if you began saving in your 20s versus your 30s) changed their life. But it probably didn’t. That is why Time in compound interest is very very important.
Even if you have some dollars right now that you are thinking to invest. You can start it right now. Because, compounding needs time to show its magic.
Consider compound interest as car and time as fuel. To see what car can do you need fuel inside a car to run and show what it can do.
And people never fuel up their car by adopting Linear thinking instead exponential thinking. If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728). The danger here is that when compounding isn’t intuitive, we often ignore its potential and focus on solving problems through other means — because we’re overthinking, but because we rarely stop to consider compounding potential.
Aside from this if you really want to level up your life and
If you’re serious about living an extraordinary life, you can use the compounding principle to your advantage to improve every area of your life. Those small daily actions add up — they count. And those Deliberate actions performed daily for weeks, months, years and decades changes everything.