You have undoubtedly heard about the power of compounding interest. It is said that Albert Einstein called it ‘the eighth wonder of the world,’ and Warren Buffet, one of the best-known investors of all time, knows this concept well. He has earned 99.7% of his current net worth after he turned age 50 and approximately 86% after turning 65.
None of us aspire to become as rich as Buffet, nor should we, but there are a few Buffet-like concepts that can be applied to a closely held business:
- Patience – Buffet began investing when he was 10 years old. He started early and applied a specific, long-term philosophy to his investing strategy. This strategy takes an enormous amount of patience, focus and fortitude. From the outside looking in, this strategy seems simple. However, consider all the risks and opportunities we encounter on a daily or weekly basis. We need to say “No” to many more things than we say “Yes” to if we want to remain on track with our investing strategy over time.
- Focus – Buffet has a very specific investing philosophy that he does not deviate from. He believes in buying attractively valued companies with strong cash flows and a competitive advantage that makes it difficult for competitors to penetrate (also known as a wide moat). Once again, this strategy seems simple, but Buffet has had to fight off many trendy and higher-risk investment opportunities during his lifetime. He has also been sitting on a significant amount of cash over the last few years to wait for more attractive opportunities, while watching many other investors make big bets that are paying off.
- Time – Perhaps this is Buffet’s greatest strength: he has been investing for 80 years, starting when he was just 10 years old! The exponential compounding at the back end of his investing timeframe, along with his ability to continue to hold true to his investing strategy, has driven much of his success in his later years.
When we think about Buffet in the context of a closely held business, I see a few takeaways:
- Give yourself enough time to see your investment compound. Many of our clients have a similar story to Buffet (at a much lower scale), where most of their business growth happens toward the end (the last 5-10 years) of their career. Which, often, more than makes up for a few decades of sacrifice and patience.
- Know your strategy and stick to it. We must be opportunistic in business but must also be careful not to get too wrapped up in trying to chase our competitors, keep up with what is trendy (temporary) or take on too much risk. Know where you are looking for opportunities so when they come, you can execute on them better than those around you.
- Continually reinvest in your business. A habit of reinvestment will keep your business ahead of the curve, give you room to pursue the opportunities that come your way and will ultimately help you take advantage of the law of compounding interest over time.
How can you apply more Buffet-like strategies in your business this year?