Showing posts from June, 2013

The Power of Compounding; or How Good is Warren Buffett's Record Anyway?

Newbie investors often don't realize how much return an outperformance of 4% or 5% produces in the long run. Compounding is so powerful that, over a long period of time, the outperformance will be massive. To illustrate, consider the returns of, arguably, the best investor of all time, Warren Buffett, versus the market (say, S&P 500). Warren Buffett has produced around 20% annual return whereas the market has returned around 10% per year (rough numbers, off the top-of-my-head). This is only a 10% outperformance but given how Buffett has outperformed for more than 40 years, the results are staggering. Let me quote Jeff Matthews, from his well-written overview of the 2013 Berkshire Hathaway Shareholder Meeting. If you want a perceptive recap of the annual meeting, I recommend reading the entire blog post ("“ We Want to Win”: The Berkshire Hathaway Annual Meeting, 2013 Edition "). ...Berkshire’s stock is at a new all-time high—$162,904 per share for the A shares on