“Mathematics is the language with which God has written the universe.” – Galileo Galilei
“My life has been a product of compound interest.” – Warren Buffett
“The greatest shortcoming of the human race is our inability to understand the exponential function.” – Albert Allen Barlett
According to the Forbes list, if Warren Buffett had not already given much of his wealth to charity, he would today be at least the third richest man in the world. Instead he is the eighth.
How did he do it?
He figured it out!
In the intellectual journey of a lifetime.
Like Albert Einstein, he thought about the problem longer.
But anyone can follow Warren Buffett’s journey.
“Come on along. Come on along.
Let me take you by the hand.
Up to the man. Up to the man.
Who‘s the leader of the band.“
– Irving Berlin, “Alexander’s Ragtime Band”
You will find, as Warren Buffett’s late, great partner, Charlie Munger, always said, ”It’s just that simple.”
Ticket Stooper
Young Warren Buffett spent days at the racetrack. He was too young to bet, but Warren never gambles anyway.
He was a ticket scooper.
He sorted through discarded tickets for winners, abandoned in error, confusion or inebriation.
Sometimes a winning horse has been disqualified and the consequent winning tickets have already been tossed away.
People can make money ticket stooping. More than $1,000,000.00 went unclaimed at New York racetracks in 2021.
But one boy placer mining tickets cannot scale.
Retailing
Young Warren Buffett bought soda by the six-pack and sold the bottles individually for a small profit.
But one boy selling soda cannot scale.
Delivery
Young Warren Buffett delivered newspapers every morning. The newspaper toss is a featured game at the Berkshire Hathaway annual meeting.
But one boy delivering newspapers cannot scale.
Investment
Warren Buffett made his first investment at age 11.
Cities Service Preferred: three shares at $38 each.
The stock plunged.
When it rose again to $40 he sold out.
Then watched it surge.
A lesson in patience.
“The big money is not in the buying and the selling but in the waiting.” – Charlie Munger
“Time is your friend. Impulse is your enemy.” – Warren Buffett
Intelligent Investment
At age 19 Warren Buffett discovered “The Intelligent Investor” by Benjamin Graham, later his professor and then his employer.
Warren learned that stocks are shares in a business that can be rationally valued.
If the value of the business substantially exceeds the market price of its shares, buyers enjoy a “margin of safety.”
Shares of undervalued businesses patiently held unto “intrinsic value” may be sold a profit, which can be reinvested in another undervalued business.
It can scale. To a point.
It made Warren Buffett a millionaire.
The Munger Modification
Buying undervalued businesses usually means buying weak or dying businesses.
Warren called them “cigar butts, with one puff left.”
The practice works, but may leave you in the shallows, always wondering when to sell.
And it cannot scale hugely.
“If you buy something because it’s undervalued then you have to think about selling it when it approaches your calculation of intrinsic value. That’s hard. But if you buy a few great companies, then you can sit on your ass. That’s a good thing.” – Charlie Munger
Charlie Munger taught Warren a simple modification of Graham’s model that could scale unto the billions.
Said another way:
“A wonderful business at a fair price is better than a fair business at a wonderful price.” – Charlie Munger
“And sometimes, it may pay to pay up.” – Charlie Munger
Because if you have a long road ahead of you, the extra you pay is dwarfed by the compounded wealth you amass.
“If you understand compound interest, you basically understand the universe.” – Robert Breault
“Money makes money. And the money that money makes, makes money.” – Ben Franklin
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. – Charlie Munger
See also, “The Power of the Force of Compound Interest” and “The Power of the Force That Makes You Rich”
Thus the answer to the age-old question:
“If you’re so smart why aren’t you rich?”
May be,
“I should have listened in elementary school when they taught compound interest.”
