Warren Buffett, the Oracle of Omaha, is a name synonymous with success, wisdom, and wealth in the world of investment.
For those in their twenties and younger, the sage advice and life story of Buffett offer invaluable lessons. And these lessons can shape their financial future.
Buffett has shared his advice with fellow investors. But there’s one lesson that should stand above the rest for the young cohort. That’s the power of time.
That because, while it’s true that Buffett made a significant portion of his wealth after the age of 50, this was largely due to the miraculous effects of compounding.
The power of time
The hallmark of Buffett’s success is undoubtedly the magical concept of compounding. This phenomenon, which he refers to as the “eighth wonder of the world,” is responsible for the substantial growth of his wealth.
Compounding accelerates the growth of investments over time, and the sooner one starts, the more powerful the effect.
It essentially works because, by reinvesting our returns year after year, we start to earn interest on our interest as well as our starting capital.
For anyone in their twenties, it’s a huge opportunity, even starting with a small sum.
Compounding takes time to work its magic, making the early years of investment crucial for long-term wealth accumulation.
Long-term outlook
Buffett’s long-term outlook syncs perfectly with the principles of compound returns, allowing him to reinvest returns in his carefully selected long-term investments year after year.
The Oracle of Omaha also takes a long-term approach due to his focus on value investing. This is the practice of investing in companies that appear to be trading at a discount versus their intrinsic or ‘book’ values.
Moreover, his commitment to long-termism enables him to ride out market volatility, avoid emotional decisions, and focus on the enduring value of his investments.
Bringing it all together
What does investing for the long run and leveraging time look like for young investors. Well, let’s imagine I’m starting a portfolio at the age of 20, and I have no starting capital.
And because I have no starting capital, I’m going to commit to contributing £200 a month, and I’m going to increase that contribution by 5% annually — broadly in line current inflation.
The thing is, at 20 I’ve got a long investment horizon, and theoretically, I could be working for the next 50 years.
So, taking into account the aforementioned, and using a 8% annualised return as an example, here’s what I’d potentially have at the end of it — £3.2m.
Of course, if I invest poorly, I could lose money. Compound returns also works negatively too.
But while I’ve used 8% as an example, it’s worth noting than more experienced investors will aim for low double-digit annualised returns.
If we swapped 8% in our calculation for 12%, the end figure after 50 years would be £12.6m. That’s a phenomenal number!
