Why Warren Buffett thinks the power of compound interest is the key to his success

Published Sun, Mar 3 20247:05 AM EST

Warren Buffett believes successful investing is like rolling a little snowball down a very long hill — the longer the hill, the bigger the snowball. The key is the power of compound interest , something Buffett often credits as the driving force behind his unmatched investment legacy. Compound interest describes the ability to earn not only interest on the principle but also reinvested interest on the interest. "We started at a very early age in rolling the snowball down," Buffett said in 1999. "The trick is to have a very long hill, which means either starting very young or living ... to be very old." Even with a small sum to start, one can accumulate wealth significantly throughout his life. For example, $10,000 with compound interest of 10% annually is worth almost $175,000 in 30 years, more than $450,000 in 40 years and $1.17 million in 50 years. Buffett, the 93-year-old "Oracle of Omaha," bought his first very stock, Cities Service Preferred for $38 a share at the age of 11. By 16, he had amassed the equivalent of $53,000 in today's dollars. In 1965, Buffett took control of troubled textile manufacturing company Berkshire Hathaway and began using it as a holding company for the many businesses and stocks he purchased over the following decades. Today, his conglomerate owns everything from BNSF Railway (the old Burlington Northern Santa Fe) to ice cream shop chain Dairy Queen, from auto insurer Geico to 6% of Apple, boasting a total market value above $900 billion. "Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been – and will be – rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes," Buffett wrote in his 2023 annual shareholder letter released last week. Buffett long ago said if he was just getting out of school at the time and had $10,000 to invest, he'd start by looking at small-sized companies. "I probably would focus on smaller companies, because that would be working with smaller sums and there's more chance that something is overlooked in that arena," he said in 1999.

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