Warren Buffet and the Methuselah Technique

In the August 29th edition of the Wall Street Journal, Jason Zweig wrote an article entitled, “Warren Buffet and the $300,000 Haircut.”  The discipline and mindset of Mr. Buffet is a positive In the August 29th edition of the Wall Street Journal, Jason Zweig wrote an article entitled, “Warren Buffet and the $300,000 Haircut.”  The discipline and mindset of Mr. Buffet is a positive model that is communicated well by Mr. Zweig.  I’m going to summarize the key points of the article and add some of my own thoughts that I hope will make a significant difference in your life.

Mr. Buffett turned 90 on August 30th and has a personal net worth of approximately $82 billion.  Almost 90% of Mr. Buffet’s net worth has accumulated since he turned age 65.  This incredible wealth is rooted in a combination of long life and solid investment growth, which he refers to as “The Methuselah Technique.” 

Mr. Buffett made his first stock purchase, 3 (yes three) shares of Cities Services Company, at the age of 12.  He had read the book “One Thousand Ways to Make a $1,000” by Benjamin Graham and realized at an exceptionally young age the power of compound interest growth over the long term.

You may have heard of compound interest.  My favorite example is the comparison of Susan and Jim, two young people who share the same birthday.  Susan starts investing $100 per month into a tax-deferred account at age 25 and does so for the next ten years.  At age 35, after investing $12,000, she stops contributing.  Jim does not start contributing until he’s 35 but contributes $100 per month for the next 30 years, which translates to $36,000 of savings.

From 1998 to 2018, the S&P 500 averaged approximately 7.2% annually (FastTrack data), so we will use a growth rate of 7.0% for this hypothetical example.  At that rate, by age 65, Susan has accumulated approximately $130,255 while Jim, who contributed three times more but started ten years later, has accumulated approximately $116,967.  Even though Susan invested only one third the amount as Jim, at age 65, she has $13,288 MORE because of the additional years of compounding growth.

You can play with future-value calculators here.

This hypothetical example illustrates that starting as early as possible (like Mr. Buffet) is pretty important when investing. Two other things you might consider about this example: First, if Susan had continued to make the same $100 per month contribution from age 35 to 65, she would have $247,200 at retirement.  Secondly, if Susan could invest $100 per month at the start of her professional career, then hopefully, she would be able to increase her contributions throughout her career.  If she increased her savings over those 40 years, she would significantly increase the amount that she would accumulate.  For example, if she increased her savings to a 40-year average of $200 per month, earning 7.0% annualized, she’d have $494,400.

What does all this have to do with Warren Buffet?  As a very young boy in Omaha, Mr. Buffet understood what I have just illustrated: what seems like a little money at the start could, given the principles of the “The Methuselah Technique,” become a large sum of money later on in life.

Mr. Buffett’s way of thinking is: it’s never too early or an amount too little to start investing.  Saving and investing over the long term can potentially lead to a great deal of financial independence.  No matter where you are in life (age 25 or age 90), keeping this in mind can serve you well.