Your Portfolio's Secret Weapon

Let’s talk about one of the most misunderstood forces in investing: compounding.

From 1965 to 2024, Warren Buffett turned Berkshire Hathaway into one of the most successful companies in history, compounding investor returns at an average of 19.9% per year [1].

Over the same time, the S&P 500 returned about 10.4% annually.

Both numbers are impressive. But the real story is in the dollar outcomes, not the annual percentages.

If you had invested $100 with Buffett back in 1965, that money would’ve grown to about $5.5 million.

That same $100 invested in the S&P 500 would’ve grown to $39,000 [2].

Buffett didn’t just double the return of the S&P. He outpaced it by 141 times.

Even more shocking: if Berkshire Hathaway lost 99% of its value today, Buffett’s 60-year return would still be ahead of the S&P over that stretch.

This illustrates a critical point: compounding is not intuitive.

Michael Batnick [3] explains it well:

“If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8×8×8×8×8×8×8×8×8, your head will explode (it’s 134,217,728).”

That’s the difference between linear thinking and exponential growth. And it’s why seemingly small differences in annual returns can turn into massive dollar differences over time.

Why This Matters for Everyday Investors

While we can’t go back in time and invest with Warren Buffett in 1965, the lesson is still incredibly relevant.

Historically, stocks have outperformed safer alternatives like bonds [4] by a significant margin—roughly 10% annual returns versus 5%. On the surface, that may not seem like a big deal. But compounding magnifies the difference.

Take a $100,000 investment over 40 years:

• At 5%: ~$700,000

• At 10%: ~$4.5 million

Same starting point. Vastly different outcomes.

And if you stretch the timeline to 60 years (similar to Buffett’s run)? That gap grows to $30 million vs. $2 million. That’s the power of compounding at work.

Don’t Underestimate the Cost of “Playing It Safe”

I’ve had hundreds of conversations over the years with people who think they’re making a fair tradeoff—giving up a little growth in exchange for lower volatility.

But more often than not, they’re unknowingly sacrificing many multiples of future wealth.

To be clear, bonds and other lower-volatility investments have their place, especially in the context of income planning and short-term needs. But for long-term growth—especially when thinking about retirement, legacy, or multi-generational wealth—stocks have historically delivered a return profile that’s hard to beat.

Final Thought

Compounding is one of the most powerful forces in finance. It rewards patience, discipline, and time. And while it may not feel intuitive, it’s real—and it’s what ultimately drives long-term outcomes.

So when we encourage clients to stay invested, to stay patient, and to think long-term, it’s not just optimism. It’s math.

Notes:

1. Please note that this is not a recommendation or solicitation to buy Berkshire Hathaway stock in any way. It is mentioned for illustrative purposes only.

2. Using the cumulative % returns from [1], the returns for Buffett and the S&P 500 (excluding costs, fees, taxes, and other expenses) would result in $100 growing to approximately $5,500,000 and $39,000, respectively. Additionally, $5,500,000 declining by 99% would equal $55,000, thus outpacing the S&P 500.

3. https://collabfund.com/blog/the-freakishly-strong-base/

4. https://smartasset.com/investing/average-return-on-an-all-bond-portfolio