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September 19, 2018

Mind-blowing compounding


Berkshire Hathaway chairman Warren Buffett shared in a Yahoo Finance interview (“Warren Buffett explains how you could’ve turned $114 into $400,000 with a simple long-term investment” dated April 25, 2018) how a sum of $114 invested in the S&P 500 in 1942, with dividends reinvested, could have turned into $400,000 today.

“Let me give you a figure that’ll blow your mind I think. I bought my first stock when I was 11 years old. It was the first quarter of 1942, shortly after Pearl Harbor,” Warren Buffett told Yahoo Finance in an interview. “I spent $114.75, [for] shares [of a stock.] $114.75. If I put that $114 into the S&P 500 at that time and reinvested the dividends, think of a figure as to what it…would be worth today,” he asked.

“The answer is about $400,000. So if I as a little kid had taken that 114 bucks I’d saved— shoveling snow (LAUGH) or whatever I’d done, [I’d have] $400,000 today. [In] one person’s lifetime. That’s America. I mean, that isn’t me. You know, it’s the huge tailwind the American economy gives to any equity investor.”

The legendary value investor was quoted as saying: “The S&P 500 companies have earned well over 10% on equity, often 15% annually for years, and years, and years, and years. They’ve done it— with Democratic administrations, with Republican administrations. Now, you get money compounding at that kind of rate underlying your investment, and you get a diversified group of that, I mean, you’re going to do well.”

Read also: (1) Warren Buffett wins bet and charity gets US$2.2m instead of US$1m

(2) Benjamin Graham on dollar-cost averaging

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