Many of us know the magic of investing money in the stock market—just letting it sit and watching it grow—but few of us really grasp just how powerfully enriching this can be. Not surprisingly, Warren Buffett, the world’s greatest investor, has a vivid example of this which he shared with me during a visit earlier last year at Berkshire Hathaway headquarters in Omaha.
First, take yourself back, way back to America’s entry into World War II. Franklin Roosevelt was president and Buffett was a young boy. And as you may know young Buffett, unlike most kids his age interested in games or sports, was basically consumed by the stock market. And at that dark moment in U.S. history, Buffett was ready to take action.
“Let me give you a figure that’ll blow your mind I think. I bought my first stock when I was 11 years old. It was the first quarter of 1942, shortly after Pearl Harbor,” Buffett recalls. “I spent $114.75, [for] shares [of a stock.] $114.75. If I put that $114 into the S&P 500 at that time and reinvested the dividends, think of a figure as to what it…would be worth today,” he asked me?
So, what do think?
I’ll give you some help. That’s way low.
Let’s pick it up with Buffett again: “The answer is about $400,000. So if I as a little kid had taken that 114 bucks I’d saved— shoveling snow (LAUGH) or whatever I’d done, [I’d have] $400,000 today. [In] one person’s lifetime. That’s America. I mean, that isn’t me. You know, it’s the huge tailwind the American economy gives to any equity investor.”
Buffett has long recommended investors invest their money by putting it into S&P 500 index funds, which are offered by most retirement plan administrators.
He acknowledges that it’s not always easy to stick with it all the way through.
“Now, the market’s gone down many times during that time,” he reminded me. “People have panicked during that time. Headlines have been terrible. You know, it looked like we were losing the war when we first got in. But America is a powerful economic machine that, since 1776, it’s worked and it’s gonna keep working.”
And then he’s almost giving me a pep talk. As in, ‘come on, you can do this!’
“Now, you don’t wanna buy to hold for a year, you don’t wanna buy with the idea that you could sell it in two years or three years necessarily, to make money. You may — you could lose money that way,” he says. “But if you buy it for $10, $20, just keep buying the S&P 500 index and forget about all the other nonsense that’s being sold to you because I’ll guarantee you one thing about (LAUGH) the stuff being sold to you, it will carry bigger fees than what (LAUGH) I’m talking about.”
By that last point Buffett means those big management or brokerage fees would eat up your returns in a huge way and you’d end up with far less that $400K.
So here’s a big question: Will it happen again? In other words, if you invested a similar sum and held it for the same 76 years or so, would you still make out—maybe not exactly the same of course—but would you still make out like a bandit?
Buffett answers that if not directly, then directionally.
“The S&P 500 companies have earned well over 10% on equity, often 15% annually for years, and years, and years, and years,” Buffett says. “They’ve done it— with Democratic administrations, with Republican administrations. Now, you get money compounding at that kind of rate underlying your investment, and you get a diversified group of that, I mean, you’re going to do well.”
You pick up these kinds of things from investing for almost eight decades.
NOTE: A version of this story was first published on March 24, 2018.
More with Warren Buffett:
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter.