Warren Buffett began investing at an early age, first entering the stock market at just 11 years old.
“I bought my first stock when I was 11 years old, in the first quarter of 1942, right after Pearl Harbor. I spent $114.75,” he told Yahoo Finance in a 2018 interview.
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He used the money to buy three preferred shares in Cities Services, a natural gas company that no longer exists.
Buffett didn’t tell this story to highlight how early he started investing or to highlight the performance of any particular investment, but rather to highlight the growth potential he could have achieved by adopting a simpler, longer-term investment strategy rather than actively picking stocks.
“Just imagine how much that $114 would be worth today if you had invested it in the S&P 500 back then and reinvested the dividends,” he argued.
That amount is considerable.
“The answer is about $400,000,” Buffett revealed. “So if I’d put that $114 aside when I was a kid, I could have saved myself money on shoveling snow or whatever. So that’s $400,000 in today’s dollars. A lifetime for one person. That’s America.”
A big tailwind for investors
Remember, Buffett made those comments in 2018, and the S&P 500 has continued to rise since the interview, meaning the $400,000 continues to grow.
In a February 2019 letter to Berkshire Hathaway shareholders, Buffett laid out an updated version of his calculations, writing, “If I had invested my $114.75 in a fee-free S&P 500 index fund and reinvested all of the dividends, my holdings would have grown to a value of $606,811 (before taxes) as of January 31, 2019 (the most recent data available before the printing of this letter), or a gain of 5,288 shares per share.”
And the story doesn’t end there: the S&P 500 continued its upward trend, though it experienced ups and downs along the way.
In the past five years alone, the benchmark index has surged about 90%.
Buffett told Yahoo Finance that turning $114 into $400,000 wouldn’t require any skill on his part.
“That’s not me. That’s the huge tailwind that the U.S. economy gives to any stock investor,” he said.
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through thick and thin
While simply riding the S&P 500 index could yield huge profits, it’s important to remember that the market hasn’t always been smooth sailing.
Buffett noted that there have been many bumps along the way.
“During that time, the markets have crashed many times, people have panicked and the headlines have been terrible,” he said, “but America is a powerful economic institution that has functioned since 1776 and will continue to function.”
In other words, investors need to be patient to benefit from the tailwinds generated by the American economic system.
Buffett emphasized the importance of adopting a long-term investment time horizon.
“You don’t want to buy it to hold for a year, and you don’t want to buy it thinking you’ll sell it in two or three years and make a profit, because that could make you lose money,” he explained.
“But if you’re buying at $10, $20, stick with the S&P 500 index and forget about all this other nonsense that’s being sold to you, because I can guarantee you one thing about what’s being sold to you: It’s going to have bigger fees than what I’m talking about.”
In fact, tracking a benchmark index can be done at minimal cost these days. For example, the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500, has a low expense ratio of 0.03%. Similarly, the SPDR S&P 500 ETF Trust (SPY), which tracks the same index, has an expense ratio of 0.0945%.
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This article is for informational purposes only, should not be construed as advice, and is provided without warranty of any kind.
