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Thursday, October 29, 2020

Warren Buffett, Lebron James, and Compound Interest

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Billionaire investor Warren Buffett is no stranger to making news headlines, but two of the most recent stories surrounding his investing philosophy stand out because everyone can relate to them. One headline involved his 90th birthday; the other was linked to the historic victory of the Los Angeles Lakers over the Miami Heat during the NBA Finals in Orlando.

How Compound Interest Paved the Road for Buffett’s Success

Let’s discuss Buffett turning 90 years old. This is a man who has been investing since the age of 10, which means that he has been at it for eight decades. We all know that the “Oracle of Omaha” is a firm believer in compound interest; he always has this in mind when he decides the next move that should be made in the billionaire Berkshire Hathaway portfolio.

Analysts who have followed Buffett’s career and crunched the numbers behind his investments have determined that he was actually a more successful investor when he was a younger man, at least in terms of profitable percentages; however, more than 90% of his fortune can be attributed to compound interest accumulation since his 50th birthday. In other words, had Buffett waited until he was 30 to start investing, he would have missed out on about 90% of his current net worth, which is estimated to be $80 billion.

Investing in a Portfolio is like Investing in Lebron James

Roughly a month after Buffett’s birthday, basketball superstar Lebron James was named the Most Valuable Player of the NBA Finals as he propelled the Lakers to win their 17th title, thus tying the record previously held by the Boston Celtics. Buffett met James in 2007, and the two have kept in touch ever since. Just one year after meeting the future Hall of Fame players, Buffett started referencing James during his lectures.

In 2008, Buffett addressed a college business class and mentioned James as he explained the limits of diversification. The example he gave was having James on your team; if you know that he is putting up solid numbers each game, it would not make sense to bench him just so that you can try different players with different styles. Buffett has stuck to five major stocks in the Berkshire portfolio, and he does not dare touch them for the sake of trying out a new strategy.

If your compound interest cash investments have steadily performed better than the rest of your assets, you should follow Buffett’s advice and let them mature even more. This strategy may not seem too dynamic, but it has certainly worked wonders for Buffett over the last 80 years.

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