From 1965 to 2024, Warren Buffett turned Berkshire Hathaway into a compounding machine, delivering an average annual return of 19.9%.

By comparison, the S&P 500 returned about 10.4% annually during the same period.

Both are impressive, but the gap in dollar terms is even more staggering.

In today's email, I'm sharing why compounding isn't intuitive and the hidden risk of investing in "safe" assets.

Compounding Is Not Intuitive

At first glance, it seems Buffett beat the market by “just” 2X.

But when compounding kicks in over decades, that small difference becomes staggering.

Consider this:

• $100 invested with Buffett in 1965 would have grown to $5.5 million.
• The same $100 in the S&P 500? $39,000.

In other words, Buffett’s return wasn’t just twice as good—it was 141 times better. 🤯

In fact, Berkshire Hathaway could lose 99% of its value tomorrow, and the return over 60 years would still beat the S&P.

This math feels hard to grasp because compounding is not intuitive.

As Michael Batnick put it:

That’s the nature of compounding; it's not linear.

And while we can’t go back and invest with Buffett in 1965, the takeaway is still relevant today.

Owning Stocks Is Essential

I frequently advocate including a healthy percentage of stocks in a long-term retirement portfolio.

Why?

Because, thanks to compounding, stocks have historically outperformed safer alternatives.

• Stocks: ~10% average annual return
• Bonds: ~5% average annual return

Similar to Buffet vs. The Market, stocks appear to have beaten bonds by 2X per year on average.

That gap may seem minor, but over time, the difference is exponential.

For example, $100,000 invested for 40 years:

• At 5%: ~$704,000
• At 10%: ~$4.5 million (6X more)

Bottom Line

The long-term benefits of compounding are simply too compelling to ignore.

And if you think this time frame is too long to be relevant, remember that most investing time horizons are much longer than 40 years.

If yours is significantly less than 40 years, you might be investing with your children or grandchildren in mind, and they probably have many decades to benefit from the magic of compound interest.

After having hundreds of conversations over the years, I’ve seen how easy it is to misjudge the tradeoff between risky and safe assets.

Many assume they’re giving up half the return for lower volatility.

But in reality, they may be sacrificing many multiples of future wealth and retirement income.

📚 What I've Been Reading

• Innovation Is Destructive and Scary (Novel Investor)
• The 'Second Law' of Retirement Rules (Kiplinger)
• 6 Questions to Make An Advisor Squirm (Fortunes & Frictions)
• 2025 Mid-Year Market Outlook (Schwab)
• What Will You Do For Money? (Ryan Holiday)
• How to Talk About Money With Your Rich Friends (The Waiter's Pad)

Hit reply to this email with comments, questions, and feedback. I read and respond to every email.

Thank you for reading!

Stay wealthy,

Taylor Schulte, CFP®