Warren Buffett says he is “going quiet”, having issued his final shareholder letter as chief executive of Berkshire Hathaway (disclosure: I own shares in Berkshire).
It seems a fitting moment to revisit the quietest force in Buffett’s success – not investing acumen, but compound interest.
Buffett, 95, once said his life “has been a product of compound interest”, and he wasn’t being modest.
The Psychology of Money author Morgan Housel notes that despite earning higher returns when he was younger, more than 99 per cent of Buffett’s fortune was built after he turned 50, and about 98 per cent came after he turned 65.
Housel contrasts Buffett with the late hedge fund giant Jim Simons, who earned astonishing 66 per cent annual returns across his career, compared to Buffett’s 22 per cent. Yet Simons’s wealth was far smaller – about a fifth of Buffett’s – because he started at 50.
The difference, Housel notes, isn’t skill but time: Buffett simply compounded for longer. One more telling example: Housel imagines if Buffett had started investing at 30 with $25,000 instead of building wealth from childhood, and retired aged 60. Even earning the same returns, he’d have ended up with about $12 million rather than $152 billion – 99.9 per cent less.
In other words, if Buffett started investing in his 30s and retired in his 60s, few people would have known of him. Almost all of his wealth stems from the foundation he laid in his youth and the decades he let it grow.
“His skill is investing,” writes Housel. “But his secret is time”.
Little wonder the definitive biography of Buffett is titled The Snowball. One wonders what Buffett would make of Ireland’s approach to compounding.
Under the eight-year deemed disposal rule, ETF (exchange-traded funds) investors must hand over 41 per cent tax even if they haven’t sold up. Eight years, of course, is barely enough time for gains to stretch their legs, let alone snowball.
