Warren Buffett is known as one of the great investors of all time. At the end of 2020, his 55-year record at Berkshire Hathaway was an annualized 20 percent return per year exactly.
Redditors chasing after crypto and meme stock returns might scoff at 20 percent a year — or 1.53 percent a month — but they’re wrong to laugh. Anyone can earn 1.5 percent or even 100 percent in a good month, but consistently solid returns over years and decades without big drawdowns is the real magic that identifies world-class investing.
I once attended an evening golf workshop where I struggled on the fairway with about 10 other students. The instructor correctly sensed we weren’t PGA tour material and said something I’ll never forget: “I hereby grant each of you lifetime permission to pick your ball up off the fairway and put a tee under it, now and forever.” He sensed that the minor accommodation, though against the rules, would greatly improve our experience and might make us more likely to enjoy a lifetime of golf. He was right. In golf, holes-in-one are like big wins in crypto and meme stocks: celebrated but not reliable or repeatable. What matters is boring, consistent, long-term performance, with as long a time in the market as possible.
Sooner is usually better in investing, but it’s never easy to get motivated. So I have something to offer you: I hereby grant you the right to count contributions to your investment accounts as part of your performance, now and forever.
For example, if you have $5,000 in your Roth IRA, decide to contribute $5,000 throughout the year (that’s just a little more than $400 a month), and at year-end see $11,000 in the account, don’t try to figure out whether you earned 10 percent or 20 percent — give yourself credit for the full 2.2x or 120 percent increase.
Averaging 20 percent returns each year — like Buffett — is not likely in the future, but it’s much more likely to happen when you count the money you put in as part of your returns. Growing your account by 20 percent a year means it will double every four years, regardless of where the money came from.
Just as a real golfer eventually stops using tees on the fairway, over time the impact of new money will be crowded out by actual investment returns as the driver of your account’s increasing size. Keep at it, though, and someday you’ll see the real magic: returns on an investment portfolio in a typical year that rival your annual expenses and even exceed your salary. At that point the idea of financial independence comes into sharp focus, maybe years before you otherwise might expect. Thinking about contributions as returns has helped me build up my own investments through some discouraging times — it turns out markets go down sometimes, too! Counting contributions as part of returns might sound like a gimmick, but if it nudges you in the right direction, your future self will thank you.
Who knows? Thinking this way might help you retire early and take up golf. Just don’t use tees on the fairway until you get permission from my old coach.
Gene Gard is co-chief-investment officer at Telarray, a Memphis-based wealth management firm.