You’ve probably heard the expression, “Go big or go home.” But there is another time-tested strategy that has a higher success rate: “Go long.”
It wasn’t just water that carved the Grand Canyon, cold temperatures that led to the last ice age, or a smart investing strategy that made Warren Buffett wealthy. In each case there was another ingredient: time … a long time.
Warren Buffett is widely accepted as one of the sharpest, most successful investors of our time. According to Forbes his net worth is over 80 billion dollars. In his book, The Psychology of Money, Morgan Housel explains that Buffett started investing as a teenager. What most people probably don’t realize is that over 99% of Buffett’s wealth was generated after he was 55, and over 95% was generated after he was eligible for social security. Being a good investor isn’t enough. Warren Buffet plays the long game.
Since 1920 the S & P 500 has earned an average annual return of 7.5%. Apply that rate of return to someone who invests $10,000 per year every year and you’ll find that in 20 years they’ll have invested $200,000 and earned a return of over $465,000, over double what they’ve invested. Keep investing for another 20 years and the total return will grow to 6 times the amount invested. Buffett, now 90, has been playing the long game for over 70 years.
The long game produces big results slowly, at least at first. The power of compound interest only becomes obvious in an investment’s third or fourth decade. That makes it a hard game to start, especially when you are young, strapped for cash and trying to grow a business. We want BIG results and we want them NOW! As we pursue one idea after another it is easy to convince ourselves that we have nothing to invest and even if we did, we need results sooner rather than later.
But waiting is expensive. Let’s say you and your neighbor are both 25. Your neighbor starts investing $10,000 every year now. You delay 10 years and start investing $10,000 when you are 35. By the time you and your neighbor are 65 your neighbor will have earned $1,331464 more than you.*
Too many people invest everything they make from their ranch back into the ranch. The result is that people, who in any other profession would be retiring, remain financially dependent on the ranch. That adds unnecessary stress on the next generation. Adding to the stress, especially when the ranch is their only significant asset, some feel they need to divide the ranch, leaving heirs with properties that aren’t economically viable and creating the potential for conflicts that could have been avoided. Imagine how different it would be if today’s older generation of farmers and ranchers had played the long game.
*Using the S&P 500 average annual return (7.5%)