How Warren Buffett’s Story Isn’t About Money But Time

That Warren Buffett is the best example in compounding wealth over a long timeframe is not a statement that would raise many eyebrows.

But how much has Buffett benefited from time, and not timing the market in his 54-year investment in Berkshire?

I did some basic crunching of Berkshire’s stock market changes ever since the number is reported starting 1965. And the results are nothing less than eye-popping.

Let’s assume Buffett did not own Berkshire as an ‘owner’ but was rather an outside investor in the stock starting 1964, and this is the only stock he would ever own.

Also assume that he held on to the stock till the end of 2018. His CAGR return from the stock over these 54 years would have been 20.6 percent.

In other words, every $100 he would have invested in the stock in 1964 would have turned to a staggering $2.46 million by the end of 2018. That’s a 24,660-bagger! Impressive, isn’t it?

But what if Buffett had tried to be “smarter” like most of us investors think we are, booked profits in years 1971, 1976, 1979, 1985, and 1989, thinking the stock had gotten overpriced, and sat on the sidelines waiting for a lower price to get in?

But, “Why these years?” you may think. Well, these were the five best years in Berkshire’s history of market performance between 1965 and 2018.

What if Buffett had missed just these five years in his 54-year relationship with Berkshire? What if he had sold all his shares in the company at the start of these five years, kept that money in cash, and invested back at the end of the year seeing the great returns in the year gone by, and especially envious of his friends who had gotten richer faster from the stock?

His CAGR would have fallen to 13.6 percent (assuming 0 percent return in each of these five years), and maybe we would have known him not as the Oracle of Omaha but a “good investor somewhere in the middle of the U.S. who writes interesting shareholder letters.”

The signature of Warren Buffett on a letter to Berkshire shareholders. (Photographer: Daniel Acker/Bloomberg)

Anyways, if the drop in CAGR from 20.6 percent to 13.6 percent doesn’t sound like a big enough disappointment from the man we now know as the world’s best investor, please note that, at this lower rate, every $100 Buffett had invested in 1964 would have become just $100,100 over 54 years. This is a number 96 percent lower than the $2.46 million (on every $100) he would have earned by staying put throughout. In other words, missing out on just 5 out of 54 years would have cost Buffett 96 percent of his current net worth!

In another case, if Buffett had sold his Berkshire shares and invested that money in the S&P 500 Index in these five best years for the stock, his CAGR would have been a tad better (compared to selling out and sitting on the sidelines) at 15.9 percent. But even at this rate, he would have turned his $100 in 1964 to just $290,500 in 2018, a number 88 percent lower than the $2.46 million he would have earned by staying put throughout.

Well, the other side of the coin is that if, instead of missing the five best years, Buffett had missed the five worst years for Berkshire’s stock (1974, 1990, 1999, 2008, and 2015), his CAGR between 1964 and 2018 would have jumped to 24.4 percent. At this rate, he would have turned his $100 in 1964 to a massive $13.1 million by the end of 2018, a number 430 percent higher than the $2.46 million he would have earned by staying put throughout.

See these two charts.

So, what’s the lesson here?

The obvious one is that time in the market and not timing the market is the best way to capitalise on stock market gains over the long-term. Not 5-10 years, but 20-30 years or more.

Buffett turned $100 to $2.46 million over 54 years by spending enormous time with Berkshire’s stock. His net worth would have been 96 percent lower if he had missed just the five best years for stock.

Also Read: Timing The Market Versus Time In The Market

Now, this may seem like a useless analysis because we are working on numbers in hindsight, i.e., after they have already happened, and no one knows which years in the future would be the best and the worst ones.

And therein lies the most important lesson.

We do not know of any investor who has been able to avoid the worst days or worst years in the market. But to be able to make decent returns in the long run, we must ensure that we don’t miss out on the best days and best years.

After all, it’s only when you look back 30-40 years later that you would know which of those few years were the best ones, which helped you make almost entirely of your stock market worth.

Till then, invest well, have patience, and just stay put.

Vishal Khandelwal is the founder of SafalNiveshak.com, an initiative to help people learn the art of investing and behavioural finance to be able to make better investment decisions.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.