You have read here about the power of compounding, and patience. Both are functions of time.
Warren Buffett calls investing over a long time horizon the “Methuselah Technique.” Jason Zweig reports in the Wall Street Journal:
This Sunday, Warren Buffett turns 90.
The chairman of Berkshire Hathaway Inc. BRK.B -0.18% is one of the most successful investors of all time, having amassed a net worth estimated at $82 billion. Yet he accrued nearly 90% of that sum after the age of 65. Investing well is important, but investing well for a long time matters even more.
“I’ve long recommended,” Mr. Buffett told me in an email earlier this month, “what I called ‘The Methuselah Technique.’ ” That, as he explained in a letter he wrote to the investors in his limited partnership on Jan. 18, 1965, is the combination of a long life and a stable, attractive investment return. Mr. Buffett made his first investment, three shares of Cities Service Co., more than 78 years ago.
“The model seems to be working,” Mr. Buffett quipped in his email, “but I’m only about 9% of the way home.” (At 90, he will be approximately 9% of the age of 969 ascribed to Methuselah in the Bible.)
From the earliest age, Mr. Buffett has understood that building wealth depends not only on how much your money grows, but also on how long it grows.
Around the age of 10, he read a book about how to make $1,000 and intuitively grasped the importance of time. In five years, $1,000 earning 10% would be worth more than $1,600; 10 years of 10% growth would turn it into nearly $2,600; in 25 years, it would amount to more than $10,800; in 50 years, it would compound to almost $117,400.
“That’s where the money is,” he recalls telling himself, according to “The Snowball,” Alice Schroeder’s biography of Mr. Buffett.
“The way that numbers exploded as they grew at a constant rate over time was how a small sum could turn into a fortune,” Ms. Schroeder wrote about his epiphany as a boy. “He could picture the numbers compounding as vividly as the way a snowball grew when he rolled it across the lawn.”
That isn’t easy for most of us to do. People severely underestimate the power of compound growth, and those errors worsen over longer time horizons and for higher rates of return.
Here’s a quick quiz inspired by Warren Buffett. If the Dow Jones Industrial Average, about 28500 this week, compounds at slightly under 1.6% annually, what will its value be on Dec. 31, 2099?
The answer: That would take the Dow to 100,000.
Don’t underestimate the effect time can have on your success. Think about how saving for your grandchild today could make a big difference in their life.
Saving for yourself early can change the entire outcome of your retirement. Save until it hurts, and don’t end up as one of the Americans who has lost hope in retiring.
The most important thing you can understand when saving for retirement is the power of compounding. No matter the interest rate, the explosive power of exponential compounding is the key to investment success.
