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Why is Warren Buffet, Warren Buffet?

Updated: Oct 8, 2020

My previous article titled ‘The Case for Disciplined Investing’ outlined why one should try and invest at a rate more than inflation. We saw that the first step is to avoid putting excess money in bank accounts and look at the alternative- liquid funds.

Now I'll attempt to show why just beating inflation is not enough and we must do it consistently (for decades even). This ties in nicely into a look into how Warren Buffet accumulate his wealth.

Buffett began investing when he was 10. By the time he was 30, he had a net worth of $1 million (that's about Rs. 65 crores adjusted for inflation). But let's just assume, he behaved 'normally' like the rest of us and spent his 20s travelling, finding his passion and so on and by the age of 30, his net worth is $25,000.

And let's say he went on to earn the incredible 22% p.a. for 30 more years to quit at 60 and retire to play golf or something. What would be his net worth at retirement?

Not $84.5 billion (which is his wealth today)

But $11.9 million

That is an astonishing 99.9% less than his actual net worth. Did you see what our thought experiment did? When we allow Buffett to behave 'normally', i.e. start saving late, quit saving when he retires at 60, we end up with no extraordinary wealth.

Effectively all his wealth can be attributed to the fact that he started early and got compounding to do its work for a long time. His skill of generating market-beating 22% returns helped, but more than his skill, it is his patience which made him what he is today.

The bottom line seems to be the message which I highlighted in my previous post as well. Obtaining a comfortable amount of wealth is simple but not easy. You don't need complicated formulae or betting or fishy technical analysis. You just need to beat inflation and do it for long periods. And most importantly, start early!

P.S. I am in no way advocating that one should not travel, find their passions and that wealth accumulation is all that is there to life. Even to seek passion from creative pursuits, we must not be worrying about tomorrow's meal or the next pandemic, which might cost us our jobs. People are being robbed away due to inflation and lack of basic financial planning. It is not a zero-sum game where one person's wealth accumulation leads to someone's loss. It is a positive-sum game where everybody's money problems can be solved so that humanity can focus on other pressing issues.

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