Billionaire investor Warren Buffett has achieved a compounded annual gain from stocks and businesses of just over 20%. And his record running his investment company, Berkshire Hathaway, stretches back to the mid-1960s.
That’s a long time to keep up such a high level of performance. And it led to mind-boggling overall returns for Buffett.
When the ‘magic’ kicks in
It’s hard for me to get my mind around just how well he’s done. But if I’d invested just £3,000 in shares 30 years ago and earned Buffett’s level of average annual returns, I’d be happy.
I punched the figures into a calculator — invest £3k and compound gains each year at 20% for 30 years. The outcome is truly amazing.
But it’s not obvious to begin with. For example, after earning 20% on my £3k, I’d have a total of £3,600 after one year. That’s nice, but not phenomenal.
However, the ‘magic’ starts to happen from year two onwards. And that’s because in the second year my average annual gain would be 20% on £3,600 and not just on the initial £3,000.
That might sound like a minor detail, but it compounds out to a major change over time. For example, after five years of compounded average annual gains of 20%, my £3k would have grown to become just over £7,465. That’s nice, but still not that impressive, perhaps.
But that’s where another key ingredient of Buffett’s success kicks in — time. It turns out that the passage of time has an exponential effect on the compounding process. And to illustrate, let’s consider the outcome after 10 years of compounding average annual 20% gains.
The calculator reveals that my three-grand would have grown to become around £18,575. And that’s not bad, but still not life-changing. However, if I’d kept going for a mere five years longer, my investment pot would be worth £46,221.
And that’s quite amazing to me, at least mathematically. In just five years, I’d have received a further gain of just over nine times my initial £3k investment.
Fantastical-sounding gains
But from that point on, the gains start to sound fantastical. For example, after just 20 years, my pot would be worth just over £115,000 –still not impressed?
Okay, If I’d earned those average annual 20% returns for another five years, my pot would be at around £286,188. And that’s after a total of 25 years of investing.
But that’s small-fry. If I’d kept going for a further five years and done it for the full 30 years over all, I’d have a little over £712,128. And that’s not bad after starting off with a mere £3,000 and adding no further money along the way.
However, in fairness, getting average annual 20% gains from investing in stocks and shares isn’t easy. Buffett has down-years as well as up-years (but mostly up). And the average annual figure of 20% takes account of all that volatility. Nevertheless, a great deal of skill and analysis went into his investing achievements.
But that’s not going to stop me from trying. The compounding process makes even lesser average annual gains worthwhile over time.
