Why high returns aren't as important as time in the market

(Originally posted in 2021)

When asked to think of a famous investor, the name Warren Buffett immediately comes to mind. But why him? What makes him such a triumph that his name has become synonymous with investing greatness. Is it Mr. Buffett’s superior investment acumen? Was he born with a rare gift that makes him naturally talented? Or has he used a unique ingredient to amass his great fortune? The truth is most likely a combination of the aforementioned points.

Thankfully for the average investor, Mr. Buffett’s secret ingredient and what has impacted his investment success the most is something we can all benefit from, and that is time.

The most compelling proof of this story is presented in Morgan Housel’s new book, The Psychology of Money.

Warren Buffett’s net worth is $84.5 billion. To attempt to contextualize just how big one billion is, consider that a million seconds is 11.5 days and a billion seconds is 31.7 years. How does a single person accumulate such a fortune? The obvious answer is strong investment returns, but immeasurably more critical is the longevity of Mr. Buffett's time in the market.

Mr. Buffett has been investing since he was ten years old, and today at age 90, he is still investing. Housel’s book depicts what Mr. Buffett’s fortune would look like if he lived a more traditional life. Envision him starting to invest at age 30 and retiring at age 60. If we run that scenario using the same investment returns Mr. Buffett has achieved (22% annually), then roughly what would his net worth be today? Astonishingly, the number is $11.9 million. That is 99.9% less than his current net worth of $84.5 billion. So, what is the real key to Mr. Buffett’s success? It is longevity derived from the fact that he has been investing for 80 years. His astonishing accumulation of net worth is a product of his early start and his persistence to stick with it.

His skill is investing, but his secret is time.

MORAN HOUSEL

Is Warren Buffett the most skilled investor of all time? No, not if skill is defined simply by investment returns. Jim Simons, head of Renaissance Technologies, has produced considerably superior returns, 66% annually, three times the returns of Mr. Buffett. However, Housel reports that Simons's net worth is $21 billion, 75% less than that of Mr. Buffett. So what investing ingredient is more powerful, returns or time? As the graphs demonstrate below, the clear winner is time.

Warren Buffett is an investment savant, and Jim Simons is a world-class mathematician and former codebreaker. The average investor has little hope of replicating the superior investment returns that they have been able to achieve. But what we can learn from them is that time in the market is what matters most, and time is something that everyone has. It is a living example of the elementary school lesson from The Tortoise and the Hare. High returns are not nearly as powerful as steady returns achieved for a long period of time.

Accessing the benefits of time is simple, invest your money in the market and then allow time to pass. But simple is not easy, and no investment ingredient is more tortured and challenged than time.

When it comes to conversations around investing, the vast majority can be categorized as follows

“It seems like something bad is about to happen so we should get out of the stock market.”

Wait, time the greatest ingredient of investment success is regularly contemplated to be left out of the recipe! Why?

The answer is simple pessimism is taken more seriously than optimism. Arguments of a looming disaster pique our interest and are often deeply rooted in facts from recent history making them especially compelling. But the fact is the adage of “this too shall pass” is a much more accurate view of the world.


What the pessimists get wrong and the error in their logic is two-fold:

• Time horizon matters – Bad things can and do happen, but if you have a long enough time horizon, you can recover. COVID-19 could cause a meaningful 1-year stock market crash but still provide a hugely positive 30-year return. Are you investing for one year or thirty?
• The world changes and adapts – Humans have a long history of solving problems and moving forward. We seem to forget that in the future, the same innovative and problem-solving behaviours will take place.

While pessimism is endlessly compelling, optimism is based on fact. Pessimism motivates us to jump out of the markets which, reduces time in the market. We know time is the most powerful ingredient to market success, so as Charlie Munger says, “never interrupt it unnecessarily”.

We hope that you enjoyed this post and want to remind you that those that remain focused on the longevity of their investment life will achieve the best results.