What’s your vision of life after age 65? You’re 25, and 65 is antiquity personified, a long way off. Okay then, what’s your vision of life after 50? And what role will money play in your envisioned future?
When it comes to financing your destiny, aside from building marketable skills and knowledge, and not doing stupid things that wreck your life and that of others, grasping the fundamental tenets of prudent investing is essential to success. Look to Warren Buffett, the Oracle of Omaha, for inspiration.
Financial writer Jason Zweig cited Buffett on his 90th birthday, Aug. 30, 2020, detailing his investing philosophy. (The Wall Street Journal, 8/29-30/20). One point stands out. Warren doesn’t like to overpay for anything, not haircuts and certainly not stocks! Like the legendary investor, John Templeton, Buffet buys perceived bargains and holds them for long periods. He’s not a constant trader.
Warren read a book at age 10 that explained the concepts of compounding in relationship to time. Albert Einstein declared, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” We assume that early on, the young man grasped the idea of buying bargains and holding until true value was recognized.
Buffett bought his first stock at age 12, noted Zweig, three shares of an oil company. That would have been 1942, and America was at war in the Pacific and Europe, and access to fuel was a do-or-die factor in battlefield success. Daniel Yergin, energy expert and economic historian, reported that a diary of one of Emperor Hirohito’s aides quoted the Japanese leader as saying that Japan went to war with America “over oil — and lost because of oil.” (Washington Post, 12/1/1991). Our novice investor decided he’d prefer stock in an energy company vital to America’s future and prosperity over a toy or other immediate gratification.
This writer has no idea what he understood about taxes or inflation, factors in long-term real returns. But he may have heard his parents or others grumbling about taxes. In 1930, the year he was born, Herbert Hoover raised the top tax rate from 25 percent to 63 percent. Later, FDR jumped the maximum rate to 79 percent. Lessons learned early endure. Buffett buys stock for the very long run, seeking long-term capital gains tax treatment when he sells.
His firm, Berkshire Hathaway, recently bought four out-of-favor Japanese stocks reflective of his philosophy — “companies that trade at a discount, pay healthy dividends and may offer less risk than is commonly perceived.” (WSJ, 9/1/20). That’s classic value investing, a style generally out of favor lately as people chased growth. But “value” has been making a comeback given soaring valuations in many growth sectors.
By buying stocks below perceived value with a good dividend flow, reinvesting dividends in more stocks, and selling at favorable long-term tax rates when a holding reaches or exceeds growth targets, one has a reasonable chance of overcoming inflation. As an investor at an early age, did Warren dream of even being a millionaire? Who knows? It now takes $15.9 million today to buy what $1 million bought in 1942. That’s inflation. With a net worth of roughly $82 billion, Mr. Buffett has beaten inflation hands down!
Perhaps the most motivational lesson in Zweig’s piece is that Warren Buffett accumulated 90 percent of his net worth after age 65! Ponder that. Opined Zweig, “Investing well is important, but investing well for a long time matters even more.”
The most popular age to start collecting Social Security is 62, at a substantial discount to what one would collect waiting to full retirement age, currently between 66 and 67. Necessity may be a factor, but what if you could delay taking benefits until age 70, letting your monthly check grow? What if you loved your work and could continue saving and building to 70 or beyond?
What if you could start growing money Buffett-style so that by an earlier target age you could be financially independent and do whatever you wanted?
Tax-planning, investment growth net of taxes and inflation, investing early and often, delaying gratification while still enjoying life sans waste and excess, giving God his share and meeting responsibilities, patience, and above all, realistic time horizons...all essential! Real growth in every facet of life and investing takes time. Simple.