Warren Buffett is an investing legend. The CEO of Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) is a self-made man who was born in the teeth of the Great Depression, and his fortune is the product of brilliance, patience, and time. And although it’s hard to live up to Buffett’s investing prowess, patience and time are certainly easier to come by.
Buffett’s most famous quote is probably the one telling investors to “be fearful when others are greedy, and greedy when others are fearful.” It’s a timeless lesson that certainly applies to the euphoric bull market in 2021 and the sell-off we are in now. Yet it’s hard to relate to someone who is one of the richest people in the world and can afford to lose tens of billions of dollars and still be fabulously wealthy.
That’s why I would argue that a different Buffett quote is far more applicable to the average investor. That quote is: “time is your friend; impulse is your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market.”
Here’s why this kernel of wisdom can help make you rich.
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Avoid the siren song of impulse buying
Investors today are at a disadvantage to when Buffett first started out. Instant access to information and droves of quantitative processes makes it challenging to uncover hidden gems. Buffett spent decades investing during a time when there were more unknowns, there was no internet, and finding stocks that were extremely discounted relative to their book value or earnings was more common.
However, investors face an even bigger disadvantage today — noise. Buffett specifically decided to set up shop in Omaha, Nebraska, far away from Wall Street, so that he could stick to his process and not be influenced by distractions in New York. Today the siren song is louder than ever. Stories of folks getting rich on meme stocks, obscure cryptocurrency coins, or any number of random ways are all around us, which can cloud judgment and lead to poor decision-making. Buffett put it well during one of his annual shareholder meetings when he warned that “the monetization of hope and greed is a way to make a huge amount of money.” Wall Street has many ways it can profit from volatility and impulse. But time and patience can be equally powerful weapons that are at the disposal of the retail investor. It’s just that many folks choose not to use these tools.
An investor’s best friend
Picking great stocks is one way to achieve outperformance. But at the end of the day, beating the market in any given year means little more than bragging rights. Rather, getting a relatively average return over time is where the real money is made.
To illustrate this example, let’s take three different people. One is age 25, the other is age 40, and the other is 55 years old. The 25-year-old has $0 already saved, the 40-year-old has $250,000 saved, and the 55-year-old has $1 million already set aside. All three people invest $10,000 annually in a retirement account and earn an annual return of 10% on their savings until they are 75 years old. Which investor has the most money by age 75?
The answer is the 25-year-old, even though that person was broke when they start investing.
Age
Starting Amount
Annual Contribution
Annual Return
