If you haven't come across it there is a mathematical formula that calculates how long it takes to double you money in investing. It is interesting to discuss in the context of Warren Buffet's investment performance.
Warren Buffett turned 90 last August and one of the headlines that celebrated his birthday read “Warren Buffett made 85% of his $69 billion fortune after turning 65”. There is hope for us all, right? Truth be known he started this 25 year journey with $11 billion!
Buffett has not made a secret of how he has done this and in fact the results aren’t even that impressive. His compounding return has been 7.6% per annum over the last 25 years. Many Australian home owners will have achieved significantly better returns on their equity by buying a house 25 years ago. The important thing is that the money remained invested and that the return from the investment was re-invested, in other words: “compounding”. This is not a new concept. Benjamin Franklin said “Money makes money. And the money that makes money makes more money”
There is a handy quirk of maths used in finance called the “rule of 72”. This rule tells you how long it will take you to double your money at a given rate of return. The method is to divide 72 by the annual rate of return. For example:
72 / 5.0% = 14.4 years to double your money at 5% growth rate
72/10% = 7.2 years to double your money at 10% growth rate
By the way, the CBA’s best cash offer is 0.35% per annum: so it will take a depressing 205 years (72/0.35%) to double your money if you save with CBA (and that’s without paying tax!). This rate of return goes some way to explaining the great exuberance being shown in the stock market currently.
For many years Buffett’s company was able to grow investor funds at over 21% p.a. Accordingly, for around 30 years or so at the end of the last century Buffett’s shareholders doubled their money every 3.4 years: 72/21% = 3.4.
His rate of growth has slowed. As his company has become bigger the amount of capital to successfully employ has become a drag on its growth rate. Should he return a comparatively meagre 7.2% p.a. over the next 10 years, when he turns 100 the headline will be: “Buffett made 50% of his $138 billion fortune after turning 90.” The rule of 72 works for all of us, Buffett just starts with more!