“Warren Buffet has a net worth of over $98 billion. About 99.9% of his wealth has been acquired after his 50th birthday.”
Numerous books have written about the investing style of Warren Buffet and Charlie Munger. But none of the books or the research papers talk about the fact that he has been investing for more than 75 years since he was 10 years old. Here it comes the effect of compounding. Let us take an example.
Rate of interest = 10%, principal = Rs. 100, n = 10 years
10 + 10 + 10 + 10 + 10 + 10 + 10 + 10 + 10 + 10 = Rs. 100
(100(1+0.1)^10) – 100 = Rs 159.374
Can you see the difference? Time is the friend of those who know how to harness it.
Such is the power of compounding. To fully harness it, start investing early and continue over a long period. Irrespective of the recession, staggered investments will generate great returns through the power of compounding.
Buffett jokes that calling someone who trades actively in the market an investor “is like calling someone who repeatedly engages in one-night stands a romantic.”
‘Be greedy when people are fearful and be fearful when people are greedy’
Investments usually work in the cycle of greed and fear. When there is greed in the market, the investors are ready to over pay for the asset. When there is fear in the market, assets are available at lucrative discounts. It is important to be aware of such cycles and ensure you are not overpaying for the asset. Identifying an opportunity and seizing it comes only from market awareness, it cannot be taught or spoon fed.
Nifty since 1996:
Source: https://stableinvestor.com/2018/01/nifty-annual-yearly-returns-historical.html
According to Modern Finance Theory, it is a waste of time to study individual investment opportunities in public securities. According to this view, you will do better by randomly selecting a group of stocks for a portfolio by throwing darts at the stock tables than by thinking about whether individual investment opportunities make sense. This makes sense to avoid running after random public securities and build your portfolio based on themes that will help you grow your wealth.
Equity is not the only asset that have generated returns for the investors. Gold, real estate, debt, AIFs, etc have generated returns for its investors. Greatest returns have been generated in any asset class after a period of poor performance. Buy when the asset is undervalued and sell when the asset is overvalued.
There are four main lessons for an investor to learn; don’t stop investing, be patient, look to long term, buy what you know.
