Home Forums Hunting & Shooting Hunter's Campfire The single most powerful factor behind successful investing?

This Warren Buffett rule can work wonders on your portfolio

By Jeremy C. Miller - MarketWatch - Tuesday, April 26, 2016

Ask Warren Buffett for the single most powerful factor behind his investing success, and he’d respond “compound interest” — without skipping a beat.

He’s been preaching this for six decades, and it’s made him a billionaire. And it’s something every investor can copy.

Beginning in 1956, Buffett spent 14 years as partner of Buffett Partners Ltd., the hedge-fund-like entity he ran before dedicating himself fully as Berkshire Hathaway Inc.’s chairman and CEO. This also marked the beginning of his side career as a teacher.

Buffett has always liked writing letters to teach investing principles. Using his typical wit and easy-to-understand style, he started his first lesson on compound interest to the inventors in his partnership by humorously calling into question the soundness of Queen Isabella’s decision to fund Christopher Columbus’s expedition to find a new route to Asia. “Aside from the psychic income associated with discovering the New World,” he wrote in a letter in 1963, “it wasn’t exactly another IBM (a stock that was doing very well at the time).”

As he figured, had the queen opted instead to invest the $30,000 at 4% instead, it would be worth over $7 trillion today. Such is the remarkable power of compound interest, which Einstein called the eighth wonder of the world. Even modest amounts, when allowed to compound at relatively low rates but over long periods of time, add up to really staggering sums.

Buffett was intent on pounding this idea into his partners’ understanding of what matters in investing.

His second story on compound interest takes a look at King Francis’ decision to commission the Mona Lisa in 1516. The math works out to show that Ferdinand’s $20,000 would be worth well over a $1 quadrillion if he’d only manage to invest it at a 6% annual rate instead.

Buffett said he hoped this figures would “close the discussion of art as in our home” (his late wife was a collector and gallery owner for a time).

In yet another humorous letter on compounding, Buffett inspects who got the better deal, Peter Minuit or the Manhattan Indians, who sold their island for $24 In 1626. When he wrote the letter in 1965, Buffett figured the land value of the island was $12.5 billion, which worked out to a 6.12% compounded annual gain. Not bad. However, had the “Tribal Mutual Fund” managed to earn 6.5% instead, their $24 would have been worth $42 billion. If they could have squeaked out yet another half-percentage point a year and get 7%, the value jumps to $205 billion.

This is Buffett’s way of demonstrating the enormous impact from even modestly higher rates of compounding over long periods of time. An extra percentage point a year may not seem like a lot when viewed in isolation, but as you can see from the example, the cumulative impact of a minor change can be enormous.

Acting rationally, consistently, while harnessing the power of compound interest over a very long period of time is what has made Buffett perhaps the most successful investor of all time. Why not harness it for yourself? Start early and think long term.

I started when I was 23 fresh out of college. Absorbed the first couple of annual salary increases dumping the funds into Fidelity. This was in 1985. The above is spot on, of course.

Your personal testimony to the truth of the piece is also powerful. "He who has ears to hear, let him hear."

I was informed of this in my younger days. I knew it, I believed it and yet, I failed to follow it. My retirement looks sparse at best.

You youngsters especially heed this information and put it to use. You would be surprised how little each month, when you start at a younger age, turns into a large amount.

My wife and I will be playing catch up for the rest of our pre-retirement. Not a pretty picture.

Yes, indeed. My wife and I started at $100 a month when I was only making $800 as a young lieutenant. It astounds me to no end to realize that our net worth now starts with the word "multi."

Compounding interest and TIME!

The other secret of Warren Buffett is just as simple. He follows it in all of his major moves.

1.) Sit on a pile of cash.

2.) When a company you like goes on sale (becomes undervalued), buy it!

3.) Count your winnings.

Warren also needs to show me where I can get a guaranteed 6% every year for 400 years. Not even Berkshire Hathaway has that kind of record.

So do you disagree with the power of compounding because of his entertaining and anecdotal example?

The wiseguy would now ask hatari what he plans to be doing in 400 years.

Hey, it's his example! No sense of humor around here some days. Jeez.

It is well known that expecting a 6% return every year is a pipe dream. Compounding interest is wonderful. Albert Einstein said “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

That's why you should start saving young. I funded a Roth IRA for my kids before they started school. 60 years of compounding interest for them.

For the record, I am heavily invested in BRK-B. It has served me well over the past 20 years. Might want to lighten up and have a look at what Warren is doing.

It kinda cuts both ways, my friend. Your objection to the example was equally inane. But let's just shrug and move on.

Bingo

Kind of hard to get them numbers when they are paying .002-.003 at most banks.

I do have funds that we went to after the banks made the decision to not pay for saving money with them.

It's an either or prospect. Everybody (myself included) wants to borrow money for auto loans, home mortgages, etc. at low rates; but, nobody wants their savings to earn so little interest. It will come around again where money will be loaned again in double digit rates and then, we will make higher rates on our savings.

Compound interest and TIME. If you are already 65 years old, you are too late.

kwg

What interest? 0.03% compound that. You have to do your own due diligence. Just like Winchesters there are no rules.

The only frizzin' thing you need to know:
Buy low…………Sell high.

Works for me.

Something bought "right" is 1/2 sold.

Yep. In fact, we are in the throes of updating our trust to set up appropriate "charities" to receive a chunk as we do not want to leave it all to the boys. We are thinking scholarship funds, college endowments and the like.

I think he also said something along the lines of when there is blood in the street (people dumping stock) buy, and when your barber is giving you stock tips - sell.

The single most powerful factor behind successful investing?
----------------

Timing and luck.

The single most powerful part of investing is the INVESTING part.

Saving is NOT investing. You can't get a guaranteed 6% anywhere, but you can get an AVERAGE return of over 10% if you invest in the stock market. That's a 100 year track record.

$100 per month starting at age 20, invest it in the stock market, and by retirement age, you'll be a millionaire.