Warren Buffett recently released his annual Berkshire Hathaway letter. You can read the whole thing here. I want to focus on a few juicy bits from page 13 of the letter titled “The American Tailwind”. Mr. Buffett spoke of his first investment of $114.75 at the age of 11 (he started hustling at a very young age, but that’s a topic for another time). The year was 1942. 77 years ago. What stood out to me was his analysis of how much that $114 could have grown to in an S&P 500 index fund over that time (if one existed).
If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.
Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants (in other words “unnecessary investment fees”), its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.
His $114 would have compounded into $600,000. Think about that! We’re not talking about starting with $114 and adding a $100/month or $1000/month. No, we’re talking about compounding only the $114. That takes my breath away. That’s astounding, even if over 77 years (which is just about a lifetime).
And $1,000,000 would have grown to $5.3 billion… yes, billion with a “b”.