Warren Buffet, the perfect example of compounding at work!
Hockeystick
Berkshire Hathaway, before 1985 it was a textile company of which Warren Buffet was a minor shareholder. But in 1985 he sold the last textile factory and made it into an investment firm for good, after a hostile take over of the company in the early sixties. Since then, Warren Buffet and his fellow companion, Charlie Munger have been investing in hundreds of companies, always looking for value. This has made Berkshire Hathaway the mastodon is by now. Over 700 Billion dollars worth in total, it is an enormous holding. And with that in the top 5 companies in the world. But that is not the most important part I wanted to talk about. I wanted to talk about the compound effect!
If you check the chart of Berkshire Hathaway since inception, you clearly see the hockeystick form, which is telling for compounding returns. Buffet and Munger have been able to create a yearly return of 10 to 12 %, due to their strategy of patiently looking for value stocks. That compounding effect shows very clearly over the last 10 years. In December of 2012, one A stock of Berkshire Hathaway was worth 133795,00 USD. Today, exactly ten years later, one A stock of it is worth a whopping 465500,00 USD. That means that Buffet and Munger managed to create a gain of 350 % in ten years. That is exactly how compounding works. And is what is creating that hockeystick.
Patience or acting
The most important thing that I have learned of watching Buffet and Munger, and reading his stock holder's lettres, is that most of the time it is a lot more interesting to do nothing than to act. "Having one good idea per year, is an amazing average" is one of his quotes. And that is exactly right, it is better to wait until the price is right to buy, than to buy too early. Because "Price is what you pay, and Value is what you get". And the aim is to get as much value as possible for the lowest price possible. And for that, you have to remain patient, very patient. This way, you can create that beautiful hockeystick for yourself!
Sincerely,
Pele23
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