What If...You Had Invested With Warren Buffett in 1965?
Interesting thought experiment (wishful thinking!) that demonstrates the power of compound interest and also that getting the market return over a long period of time hasn’t been a bad strategy either.
Warren Buffett is out with his annual letter for 2016 which is a must-read for investors because of the common sense, homespun advice from the best investor of our time. For those not familiar with Mr. Buffett’s investing prowess, check out the first page of his report which has performance data on his holding company Berkshire Hathaway Hone in on the Compounded Annual Gain (CAG) number at the bottom of the first page and check out the middle column, Per-Share Market Value, and you will see that his CAG from 1965 – 2016 has been 20.8%. Let’s have some fun with an investment calculator and pretend that you were Warren’s neighbor in 1965 and decided to invest $1,000 with Warren (equivalent to $7580 in today’s dollars) AND have continued to hold onto that investment.
Care to guess how much that $1,000 investment in 1965 compounded at a 20.8% rate annually for over 50 years amounts to? Over $18 million (from investor.gov)?
And as that generation of early investors in Omaha gets older, there are more and more stories like this about multi-million dollar gifts being made in the Omaha area:
Dick Holland, who ended up with tens of millions of dollars from his investments with Buffett in the early 1960s, figures that at least $1 billion in Berkshire-related money has been donated and pledged in Omaha.
“It’s all over,” said Holland, who was the main donor for the $90 million Holland Performing Arts Center in downtown Omaha. “There wouldn’t be a concert hall or anything like that. It changed the whole entertainment scene in Omaha.”
The $370 million Fred & Pamela Buffett Cancer Center is the latest of several major Omaha facilities where the biggest donor contributed Berkshire-originated money. All together, such buildings cost more than $600million, each with major donations from Berkshire investors.
Ok, but Warren Buffett is a once in a lifetime investor and what is the likelihood that 1) you can identify the next Warren Buffett (if one exists) and 2) that you will be able to invest with him? Well, Buffett’s chart on page 1 also shows the compounded annual return of the S&P500 over this same time period of 1965-2016, which was 9.7%. And what would $1,000 invested in 1965 amount have grown to 52 years later? Over $123,000!
Morale of the story: Investing with the next Warren Buffett may not be possible, but getting the market return over a long period of time (think compound interest) is a great way to generate significant wealth too!
One big caveat: Past performance is no guarantee of future results and annual returns are not as smooth as these charts indicate (i.e., buying and holding ‘aint easy when the market is turbulent).
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.