On ‘Time’: Warren Buffett & The Rolling Stones

Written by Tom Stanley, Investment Adviser, March 2024


Summary:

  • Warren Buffett 93 has been investing since age 13 – he has had a lot of time.
  • As one of the most successful investors of the modern day, Buffett has accumulated 99% of his net worth after his 50th birthday, and 97% after he turned 65.
  • While very well known for his stock picking ability, many overlook his mastery of time and patience as a key aspect in his success story.
  • Every year, Buffett shares a letter with investors, offering a glimpse into his thoughts and mindset. Below, I’ve included three key lessons from this year’s letter.
  • One of the most common ways investors hinder their wealth-building journey is by abandoning successful strategies after a few bad years.
  • Aligning your portfolio towards a long-term goal and remaining patient are key to financial success through compounding.
  • Call to Action: You don’t have to pick stocks like Buffett to benefit from the power of compounding returns – you do however have to ensure you are invested appropriately. If you want to make sure your investment plans are best aligned to benefit from compounding returns, reach out and book a time with one of our advisers using the links below.


What do Warren Buffet and The Rolling Stones have in common?
 
To quote the famous Rolling Stone cover:

“Yeah, time, time, time is on my side, yes it is…”

Warren Buffett, at 93 years of age, has had a lot of time.


Most people will cite Warren Buffet as one of the most successful investors in modern day, they are correct.

But those same people will often neglect to mention the key variable in his extreme success.

Time

What do I mean by this? To share insights from Morgan Housel of Collab Fund’s ‘Last Man Standing’:

“Everything worthwhile in investing comes from compounding. Compounding is the whole secret sauce, the rocket fuel, that creates fortunes.
 
And compounding is just returns leveraged with time.
 
Earning a 20% return in one year is neat. Doing it for three years is cool. Earning 20% per year for 30 years creates something so extraordinary it’s hard to fathom. Time is the investing factor that separates, “Hey, nice work,” from “Wait, what? Are you serious?”
 
The time component of compounding is why 99% of Warren Buffett’s net worth came after his 50th birthday, and 97% came after he turned 65.
 
Yes, he’s a good investor.
 
But a lot of people are good investors.
 
Buffett’s secret is that he’s been a good investor for 80 years.
 
His secret is time. Most investing secrets are.”

In the fast paced world where Uber Eats can deliver a hot pizza to your door in 15 minutes, or an online AI powered chatbot can resolve abstract shopping queries faster and better than a human (Klarna link), it is only natural to become impatient.
 
As an investor, being impatient is a killer – Warren Buffet and the late Charlie Munger are the poster children for patient, and disciplined, investment – with Munger famously saying:

“the first rule of compounding is to never interrupt it unnecessarily.”

Interrupting compounding can happen in many ways. The most common is finding a strategy that produces high returns for a period of time then abandoning it when it inevitably has a few bad years.
 
But before we delve deeper, lets look at Berkshire’s latest letter, and put Buffet’s track record in perspective.
 
 
Time & Compounding in Practice – Annual Berkshire Hathaway Letter:
 
In March each year Warren Buffet pens a letter to all investors in Berkshire Hathaway (read it here) – In this years’ letter Warren leads off honouring his long-time friend and business partner, Charlie Munger who he heralds as the ‘Architect’ of Berkshire Hathaway.


Source: Berkshire Hathaway Letter, March 2024


Warren Buffett’s annual letter to shareholders attracts a lot of attention – and for good reason.
 
Since taking control of Berkshire Hathaway in 1965, Buffett has led the company to return a compound annual growth rate of 19.8% for its shareholders, nearly twice that of the S&P 500 which has returns 10.2% including dividends.
 
What does that look like over nearly 60 years?


Source: Berkshire Hathaway Letter, March 2024


Those percentages are difficult to fathom, graphing these numbers truly shows the difference in cumulative return over time.


With the above context, what insights can be drawn from Buffet’s letter this year?

3 Key Takeaways from Warren Buffett’s Annual Letter:
 

  1. In the short run the market acts as a voting machine; in the long run it becomes a weighing machine – patience matters.

 
“As Ben Graham taught me, “In the short run the market acts as a voting machine; in the long run it becomes a weighing machine.” Our goal at Berkshire is simple: We want to own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers.”
 

  1. Occasionally, markets and/or the economy will cause stocks and bonds of some large and fundamentally good businesses to be strikingly mispriced – short term manias happen and continue to do so.

 
Indeed, markets can – and will – unpredictably seize up or even vanish as they did for four months in 1914 and for a few days in 2001. If you believe that American investors are now more stable than in the past, think back to September 2008. Speed of communication and the wonders of technology facilitate instant worldwide paralysis, and we have come a long way since smoke signals. Such instant panics won’t happen often – but they will happen.
 

 
Though the stock market is massively larger than it was in our early years, today’s active participants are neither more emotionally stable nor better taught than when I was in school. For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.
 
One fact of financial life should never be forgotten. Wall Street – to use the term in its figurative sense – would like its customers to make money, but what truly causes its denizens’ juices to flow is feverish activity. At such times, whatever foolishness can be marketed will be vigorously marketed – not by everyone but always by someone.”
 

  1. When you find a truly wonderful business, stick with it – discipline and a long term view prevail.

“American Express began operations in 1850, and Coca-Cola was launched in an Atlanta drug store in 1886. (Berkshire is not big on newcomers.) Both companies tried expanding into unrelated areas over the years and both found little success in these attempts. In the past – but definitely not now – both were even mismanaged.

But each was hugely successful in its base business, reshaped here and there as conditions called for. And, crucially, their products “travelled.” Both Coke and AMEX became recognizable names worldwide as did their core products, and the consumption of liquids and the need for unquestioned financial trust are timeless essentials of our world.

Warren closes out with a statement that can only be described as incredible humble considering his success.

“Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”



On Interrupting Compounding:

It is all well and good highlighting how successful Warren has been for so long, but what can we as investors learn and do with this information?

Moving back to Morgan Housel (as he is a fantastic writer and author) – avoiding interrupting compounding is key:

“Interrupting compounding can happen in many ways. The most common is finding a strategy that produces high returns for a period of time then abandoning it when it inevitably has a few bad years.
 
Investing in a strategy or sector that produces great returns for five years but shakes your faith to the point of abandonment after a collapse in year six will likely leave you worse off than a strategy that produces merely good returns but you can stick with for years six, seven, eight, 10, 20, etc. This is especially true if, after abandoning a strategy in its down year, you move on to whatever the new hot thing is only to repeat the process.
 
Complexity is another door to interruption. It can produce higher returns. But the more knobs you have to fiddle with, the more levers you have to pull, the higher the odds that something, at some point, will cause you to second-guess yourself, or reveal a risk you hadn’t considered, or tempt your clients to leave – all of which stops the clock of compounding and can outweigh any return advantage you had when the strategy worked.
 
None of that is intuitive in the moment, because the pursuit of the best returns at all times feels like the best way to maximize wealth.
 
It’s not until you consider the time factor of compounding that you realize maximizing annual returns in a given year and maximizing long-term wealth are two different things.
 
Carl Richards once made the point that a house might be the best investment most people ever make. It’s not that housing provides great returns – it does not. It’s not even the leverage. It’s that people are more likely to buy a house and sit on it without interruption for years or decades than any other asset. It’s the one asset people give compounding a fighting chance to work.”


Closing Remarks:
 
Warren Buffet, known as the ‘Oracle of Omaha’, has been one of the greatest investors the world has seen, but others have generated greater returns (link).
 
What others haven’t done is kept compounding returns from age 13 to age 93.
 
As markets make fresh all-time highs it is worth keeping perspective.
 
Good times come, and they go, but great riches and/or robust retirement plans are not made in a week, or a month, or a year.
 
Investing is journey and the more time, patience, and discipline you can maintain, the better off you will be.
 
As advisers, it our job to help you have a clear direction, and maintain discipline, not interrupting compounding on your journey.
 
If you want to discuss the lessons taken from Warren Buffett, and how they may apply to your investment plans, please feel free to book a call with us below – we are here to help.




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