Warren Buffettâs net worth is around $84.5 billion. Of that, $81.5 billion came after his 65th birthday. Our minds are not built to handle exponential growth. We tend to think linearly, which makes compounding feel counterintuitive and almost magical.
The key to Buffettâs fortune is not just that heâs a good investorâitâs that heâs been a good investor for 75 years. Time is the secret ingredient that makes compounding work.
If Buffett had started investing at age 30 instead of 10, his net worth today would be approximately $11.9 millionâ99.9% less than his actual wealth.
His skill is remarkable. His time is what's made that skill pay off so spectacularly.
Jim Simons, the mathematician who founded Renaissance Technologies, has compounded money at 66% annually since 1988âthree times better than Buffettâs rate. But Simonsâ net worth is 75% less than Buffettâs.
Why? Simons didnât start serious investing until age 50. Buffett started at 10. The difference isnât skillâitâs time.
In the 1870s, scientists discovered that the Earth had experienced ice ages. The question was: what caused them? The answer turned out to be subtle changes in Earthâs orbit that slightly reduced the amount of sunlight hitting certain parts of the planet.
Hereâs the key: the temperature change wasnât dramatic. Summers just became slightly coolerâcool enough that winter snow didnât fully melt. The next year, more snow accumulated. Then more. Over thousands of years, these tiny changes compounded into mile-thick ice sheets covering entire continents.
The ice ages werenât caused by dramatic events. They were caused by small changes that accumulated over time. This is exactly how compounding works in investingâand why itâs so hard for our brains to grasp.
We intuitively understand linear growth: if you save $1,000 a year for 30 years, youâll have $30,000. But compounding is exponential, and our brains didnât evolve to think exponentially.
There are books written about economic cycles, trading strategies, and sector analysis. But the most powerful variableâtimeâgets the least attention because it doesnât feel like an insight. It feels like stating the obvious.
But itâs not obvious when you see that 96% of Buffettâs wealth came after his 65th birthday. Thatâs not intuitiveâitâs the magic of compounding over extreme time periods.
Good investing isnât necessarily about earning the highest returns. Itâs about earning pretty good returns that you can stick with for a long period of time. Thatâs what makes compounding work.
A strategy that earns lower returns but can be maintained for decades will almost always beat a strategy that earns higher returns but burns out quickly.
Most people want to get rich quickly. The irony is that the surest path to wealth requires patience. Trying to speed up the process often leads to risks that set you back or knock you out of the game entirely.