Warren Buffett's Investments vs. Your Investments
Warren Buffett is perhaps the most famous investor in the world. He is the third-richest person in the world, with a net worth of $86 billion. The Oracle of Omaha has undoubtedly had a positive influence on investors, through practical advice shared in the media and through the letters in his annual Berkshire Hathaway reports, and he has been a champion of low-cost index-based investing. And aside from his investing accomplishments, his philanthropic generosity will have a lasting reach into the future.
But what about his actual returns?
The problem with comparing Buffett to a normal investor—even an investor with access to institutional share classes, like our clients at Halpern Financial—is that he gets far better deals than any other investor could even imagine. Companies that want to be acquired by Berkshire Hathaway will create special share classes just for him as an individual, often with the ability to convert a loan into equity at an advantageous rate, while collecting a very favorable yield until the conversion. The public stock exchanges simply do not have investment vehicles that essentially guarantee a positive return from the get-go, with the opportunity to convert at favorable terms!
Warren Buffett cites his best investment as “The Intelligent Investor” by Benjamin Graham in 1949—an essential text for any value investor. He has called the house he purchased in 1958—and still lives in— “the third best investment” he ever made, behind only wedding rings.”
He bought the house for $31,500, or about $250,000 in today's dollars. As of 2017, the house was worth an estimated $652,619, a tiny fraction of his overall net worth. That’s without taking into account improvements he has likely made on the home over the years. Even if you use $1 million as an assumption, that is a rate of return of just 5.75%. Clearly, the value of Buffett’s third-best investment is more sentimental than financial.
Real estate isn’t a bad investment, but it can’t compete with equities over any extended period of time. The S&P 500 has returned just over 10% annualized over that same time period, with dividends reinvested…and it never needs to be furnished or repaired!
The great lesson we can all take from Warren Buffett is to embrace the elegantly simple, common-sense path to building wealth. Make the most of the opportunities available to you, live within your means, and save and invest according to time and research-proven strategies. Building wealth may not be easy, but it is simple!
There is one way the average investor can use Warren Buffett’s most powerful investment tool. Be patient enough to take advantage of the power of compound interest and time. Be a tortoise, not a hare, just as Buffett was when he bet a hedge fund manager $1 million that a no-frills index fund would outperform a far more complex investment strategy.
If Warren Buffett had taken the initial $31,500 his house was worth at the time of purchase, and invested into the S&P 500 and just left it there, today it would be worth over $15 million with a gain of over 48,000%! Sentimental value aside, that likely would be one of his best investments! Time is an incredibly powerful weapon to unleash on your wealth!