A 30 year investing period would put me at 58. The significance of that age, I realized, is that it puts me real close to my father’s age now. It might not seem like much but for a very long time…. I defaulted to believing my parents were in their 40s. It’s just a default thing. 

This was inspired by Morgan Housel on Ted Seides’ podcast. In the interview, he referenced a segment from his new book, the Psychology of Money, where he noted Warren Buffett would’ve had a net worth of ~$10M if he compounded wealth at ~22% from 25 to his 60s compared to starting in his early teens and compounding into his 90s. 

The key point he was making was the value of time. I don’t remember the details but the key factor was how some 80%+ of Buffett’s current net worth was made in the latter part of his life. 

It not only put the patience required for compounding into perspective but inspired the exercise for myself. I wanted to see how much I’d have if my investment fund compounded 20% returns for 30 years. Turns out, I would be mighty happy with how much I’d have at that point. This also puts into perspective the feelings of being in a “rush” to generate wealth. I mean, if I can maintain 20% for 30 years…. What’s the rush? I’ll get there eventually and I can’t really force it. 

Honestly, I would love to have that 30 years of compounding achievable in 5 years. Who wouldn’t? It’s the classic greed of the human psyche. I wonder if such basic predictability and preference for quick wealth makes me flawed or just another average human. 

I’m not saying achieving 20% returns is easy. Heck, it’s extremely difficult. Especially to achieve it over a 30 year period. It won’t be a cakewalk at all. But it doesn’t seem so outlandish. My hubris at work once again. 

I can’t remember if it was Dan Loeb or David Einhorn… they are both great investors and I have a memory that one of them noted how their discount rate was 20% because that’s the return they want to achieve. I just have a vivid recollection that it made so much sense. I mean, when asked about discount rates, Munger said one should view it as the opportunity cost of making the investment. Simply, if I’m seeking 20% returns then that would be my opportunity cost. 

Even some pension funds have an internal hurdle rate of 15%. And I’m quite sure a good number of PE funds are striving to achieve 20% returns (I think this is what an investor would also expect when they pay their fees as well). So it just doesn’t seem so outlandish to aim to achieve 20% per year. Especially when you don’t have career risk. 

Aside from it seeming reasonable (purely up to judgment), this really made me think about the need for patience. Because if you compounded for 30 years at a 20% clip…. I wasn’t seeing anything material until year 25. So, the last 5 years of compounding mattered most. This really put into context how much I would be able to do with my wee little capital base no matter the annual return %. 

Knowing most of my wealth will come near the end of any cycle, I guess the prudent thing should be to not fuck up the small base by making foolish decisions. This is definitely a big risk…. And even if I know I’ll have to be patient for a while… I imagine greed will rear its ugly head and make me think about taking unnecessary risks. Dear God, I hope I can stay strong and sane. 

I do hope I can look back on this moment 30 years later and say 20% annual returns were doable indeed.