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 annualised 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 annualised 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 annualised 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 annualised 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 annualized 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 annualised 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 annualised 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 annualised gains worthwhile over time.
The post If I’d invested £3,000 like Warren Buffett in 1992, here’s how much I’d have now appeared first on The Motley Fool UK.
5 stocks for trying to build wealth after 50
Markets around the world are reeling from the current situation in Ukraine… and with so many great companies trading at what look to be ‘discount-bin“ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.
Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…
We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.
Claim your free copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Should I buy Taylor Wimpey shares after its crash?
Is now a good time to invest in stocks?
Is this the best time to start a Stocks and Shares ISA in years?
Here’s why the Lloyds share price crashed 10%
If I invested £500 in Deliveroo shares now, how much could they be worth in a year’s time?
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.