There’s a Secret to Warren Buffett’s Investing Success — and It Has Nothing To

Warren Buffett is 92 years old, and according to Forbes, his $117.6 billion net worth currently makes him the No. 5 richest person in the world.

According to Bloomberg, Buffett amassed a large percentage of that fortune after he turned 50. In 2020, when Buffett was worth just $81 billion, CNBC reported that $70 billion came after he qualified for Social Security, which means Buffett gained $107.5 billion between his mid-60s and today.

Those facts have created a widely accepted but false narrative that Buffett started investing well into middle age, which gives procrastinators room for optimism. If they could become excellent investors like Buffett, they could afford to get a late start, too.

But Buffett’s stock market prowess is only part of the story. His greatest strength is the same as that of every investor — compounding and the time it needs to reach its true potential.

Buffett Is Good, but Not the Best

Over the course of his career, Warren Buffett has generated annual returns averaging roughly 22%, an incredible record that approximately doubles the S&P 500.

But that’s junior varsity compared to Jim Simons.

According to CNBC, the Renaissance Technologies hedge fund founder has compounded cash at a rate of 66% annually since 1988. That’s an otherworldly number that outperforms the Oracle by a multiplier of three.

But according to Forbes, Simons is worth just $28.1 billion — $90 billion or so less than Buffett.

That’s because when it comes to investing, time and compounding are more consequential than returns.

Buffett was born in Omaha, Nebraska, in 1930 and quickly displayed a penchant for wealth generation as he sold chewing gum and Coca-Cola in his neighborhood when he was 6 and later delivered newspapers.

Buffett was hardly the only kid hustling for pennies during the Depression, but at 11 years old in 1942, he launched a lifelong love of investing when he bought his first stock — three shares of an oil company called Cities Service at about $38 each.

According to CNBC, he sold the shares soon after for $40 each. After celebrating his $6 profit, the young Buffett watched helplessly as Cities Services climbed to $200 per share.

It was the hardest but most valuable lesson of his career: The key to investing success is to compound gains by buying and holding for the long term.

In 2016, Buffett said, “The money is made in investments by investing and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”

What If Buffett Had Been a Typical Investor With Oracle-Level Returns?

It’s true that Buffett founded Berkshire Hathaway in 1965, but he made his first million by the time he turned 30 five years earlier in 1960 — that’s $10.33 million in today’s money.

Far from starting to grow wealth at 50, Buffett was rich by any reasonable standard in his late 20s. He went from rich to filthy rich by holding those investments and adding to them continuously over decades, which gave compounding the time it needed to work its magic on Buffett’s portfolio.

But what if instead of starting at 11 and continuing until 92, Buffett had taken a more conventional approach?

CNBC imagined a scenario where Buffett behaved like a kid as a kid and breezed through his 20s, job-hopping while finding himself and exploring the world. In this storyline, Buffett starts investing at 30 with $25,000, not $1 million, and retires at 60 instead of muscling through to 92.

Even if he had achieved the same astounding 22% annual returns, his net worth today would be $11.9 million. That’s an admirable nest egg, indeed, but it’s more than 99.9% less than his real-life 12-figure fortune.

In this scenario, despite his skill and performance, the Oracle of Omaha would be just another Nebraska millionaire who got to retire a few years early and get the next generation off to a good start — and without the key ingredients of time and compounding, you would have never heard the name Warren Buffett.

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