What Do You Think of an Average Annual Return of 26%?

Exactly as the title suggests. If you invested for a year and achieved a 26% return, what do you think about it? You could see it as quite impressive, earning $260 from a $1,000 investment. Alternatively, given the volatility of the stock market, you might think it’s something you could achieve in a single day, making it seem rather underwhelming.

So, let’s reframe the question: Do you think you can invest better than Warren Buffett?

Warren Buffett, the Oracle of Omaha, a titan of value investing, a guru. The 9th richest person in the world (as of May 2024).

Among the top 10 richest people globally (as of May 2024), Warren Buffett is the only one who made it there solely through investing. In fact, it’s rare to find anyone in the ranks of the world’s richest who isn’t a founder or a family member of a founder. This might suggest that consistently making money through investing is harder than succeeding in business.

Did you know that Warren Buffett’s investment return has averaged in the mid-20% range annually? Really? How could he amass over $100 billion with such a modest return?

Warren Buffett is famously known for starting to work at the age of six. He picked up golf balls, delivered newspapers, and sold Coca-Cola. With the money he diligently earned from these jobs, he made his first investment at the age of eleven. From then until now, at 93 years old, he has been investing for about 82 years. Let’s skip the unknowns and start from when he was 15 years old.

At age 15, Warren Buffett had about $2,000. Let’s calculate backward from here. He started investing from this point until his current age of 93.

The total investment period is 78 years, with $2k at age 15 growing to $137bn at age 93.

So, what would be the average annual return rate?

It’s about 26%. Even this calculation assumes no additional funds were added after age 15 (e.g., no additional investments from earned income). If he did add more money, the actual return rate would be lower.

Does this calculation seem off? Open your Excel and try it yourself.

=2000*(1+0.26)^78

Compounding at 26% annually, after 78 years, you get approximately 6.744 million times the return. So, $2k grows to about $130bn. Isn’t that astounding?

Then, why don’t we see people around us becoming world billionaires through stock investing?

It’s common to hear about people achieving tens or hundreds of percent returns in a few months, but it’s hard to find anyone who became a billionaire due to such returns over 10 or 20 years. If you are tempted by such high returns, take a moment to reflect seriously on yourself.

Back to the first question, what do you think of an average annual return of 26%? Only a handful of people, blessed with both skill and luck, can afford to take it lightly. For the rest of us, we should regard this rate with reverence. If not, review “THE FORMULA FOR BECOMING RICH” and take time to organize your thoughts.

One interesting aspect of Warren Buffett’s 26% annual return is that extending the period by just one year results in an additional $30bn. Conversely, shortening it by a year reduces it by $30bn. While the annual profit in the first year might have been just around $500, it makes a difference of billions of dollars after 78 years. Making a huge amount of money in the short term is nearly impossible, but achieving it in the distant future is a challenge even ordinary people can take on.

Even if your annual return is less than the volatility of most stocks (as long as you live long enough), you could become one of the world’s wealthiest in your later years! Don’t underestimate a 26% return!

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