Warren Buffett (Trades, Portfolio) is undoubtedly the greatest investor of all time.
His skill at investing, however, is only partially responsible for his success. Even though picking the right stocks has been a significant contributor to his wealth creation over the years, the power of compounding has been a much more prevalent force.
The power of time
Buffett has benefited from the full impact of compounding because he has been saving and investing since before he was a teenager. In my view, this is, without a doubt, the critical factor in the Buffett story. Indeed, other investors have generated better returns than the "Oracle of Omaha" for shorter periods.
The most well-known of these investors has to be Peter Lynch. By the time Lynch resigned as a fund manager in 1990, his Magellan fund had averaged a 29.2% annual return since 1977.
Henry Singleton, a man Buffett once said "has the best operating and capital deployment record in American business," achieved a 20.4% compound annual return to shareholders between 1963 and 1990.
Value investor Walter Schloss, who Buffett profiled in his essay "The Super Investors of Graham & Doddsville," achieved a return of 21.3% per annum for the 28 years to 1984.
Compared to all of the above, from 1965 to 2017, Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial)Â rising market value generated a 20.9% annual return.
Looking at these examples, it is clear Buffett's returns of 20% or more per annum are not that exceptional on a short-term basis. It is his long-term track record that stands out. Unlike the other investors mentioned (they are only a sample of well-known investors who've achieved 20%-plus annual returns), Buffett has not retired, stepped down from the Berkshire board or died; he's still going and has been compounding his capital for nearly eight decades.
Skill is only part of the picture
My intention is not to criticize Buffett. Rather, what I am trying to show is that high teens or 20% average annual returns are not that exceptional. What separates the successful from the ultra-successful investors is the ability to remain in the game for as long as possible.
In many ways, staying in the game and continuing to compound capital is far more critical than generating market-beating returns year after year. Even if you invest in the S&P 500, which has produced an average annual return of around 9.5% for the past 100 years, you will become wealthy. You don't have to have the investment prowess or skill of Buffett. Let's be honest, 99.95% of the rest of the world's population does not have the same advantages he does, so there's no point in us trying to replicate his investment strategy.
While we might not have the same level of intelligence, what we do have is time. And we should seek to use this to our advantage. Time and the desire to minimize the risk of a total capital impairment.
Don't overlook this key factor
In my opinion, Buffett's age and perseverance in investing are some of his most overlooked traits. Yes, he is a great investor, but he is only so renowned today because he has kept plugging away, year after year, compounding capital and growing his influence as well as wealth. He could have stopped managing money 20 years ago, and he would have been able to retire quite comfortably. But he didn't, which is what sets him apart from other highly successful investors who achieved similar returns but left the game early.
If you boil down the whole argument, you could say the secret to Buffett's success over the past seven decades has been time and patience, as well as a bit of skill and luck.
Disclosure: The author owns shares of Berkshire Hathaway.
