Last month, I participated in a charity event organized by my co-worker Rob Tétrault, running a half marathon to support the Canadian CMV Foundation. Typically, preparing for a long-distance run requires a consistent regimen of logging miles week after week, gradually building up stamina for the event. Looking back, I regret not adhering to that disciplined training routine. Despite not achieving any remarkable speed records, I managed to complete the run. However, the lack of consistent training made it more challenging than necessary. Nonetheless, I am grateful for the experience, knowing it was all for a worthy cause.
Consistency is equally crucial in the realm of finance. With sensational headlines and captivating stories bombarding us, it's easy to get caught up in the drama. We often find ourselves swayed by short-term trends and daily market fluctuations, making it difficult to stick to a long-term strategy. A shining example of consistency and patience is Warren Buffet, widely regarded as one of the world's wealthiest individuals and greatest investors. Yet, the secret to his massive fortune lies not solely in his investment strategy or returns but rather in the factor of time. The story goes that Buffett purchased his first stock at the young age of eleven, becoming a millionaire by the time he turned thirty. Today, in his nineties, he continues to invest and remains one of the richest people globally, with Forbes estimating his net worth at over 110 billion dollars. When considering the substantial sums he has donated to charitable causes over the years, his total earnings likely approach 200 billion dollars. The majority—nearly 98%—of his wealth accumulated after he turned sixty. This exemplifies the power of compounding, where the largest gains in dollar figures occur in the later years. Numerous books and financial enthusiasts have extensively explored Buffett's strategy and his approach to valuing companies and the markets. While his approach is undoubtedly noteworthy, it is not the sole reason behind his immense fortune. Recently, I came across an illustrative hypothetical scenario shared by Morgan Housel of the Collab Fund. Let's imagine that Warren Buffet started with $25,000 in his thirties and retired in his sixties, aligning more closely with the average person's situation. Even if we assume he employed the same strategy and achieved similar investment returns, his wealth would have been a staggering 99.9% less than what it is today. Time emerges as the most significant factor, with Buffet's ability to let his money compound over 80 years playing a pivotal role in his wealth accumulation. When assessing our investment portfolios, we often fixate on the rate of return. Questions arise: Is the return higher or lower than last year? Did my neighbor achieve impressive gains? It's tempting to chase maximum returns, and there's nothing inherently wrong with such a mindset. However, the rate of return represents just one facet of the equation and must be considered in context. The duration for which we allow our investments to compound uninterrupted exerts the most substantial impact. Time reigns as the paramount factor. Unfortunately, these two puzzle pieces can sometimes conflict with each other. Buffet's story serves as a prime example. His strategy, like any investment approach, is not flawless; trade-offs are inevitable. Broadly speaking, Buffet employs a buy-and-hold strategy, seeking out undervalued companies with strong fundamentals that often pay dividends. This approach tends to be more conservative, but the trade-off is that it rarely emerges as the top performer in a given year, lacking the high-growth element. Like any investor, Buffet has experienced both prosperous and challenging years. Particularly during the 1990s dot-com frenzy, Buffett's strategy significantly underperformed. Instead of succumbing to the allure of the booming internet sector, Buffet remained steadfast in his approach. It took years, until the 2000s, for the dot-com bubble to burst and Buffett's strategy to regain favor. Ultimately, his consistency was rewarded. Had Buffet abandoned his approach and chased after dot-com stocks, who knows where he would be today? Consistency and time are the true secrets to achieving compound growth. While most individuals cannot allow their investments to compound for over 80 years like Warren Buffet, we can still apply some valuable lessons. Whether it's investing or preparing for a charitable half marathon, consistency and time remain vital. In my opinion, the most practical application of these lessons lies within the context of your financial plan. Your plan serves as a blueprint, articulating your financial goals and guiding you on the path to achieving them. Your investment strategy must align with the parameters of your plan. Every strategy involves trade-offs, but the best strategy is the one you can consistently adhere to over an extended period, long enough to fulfill your financial objectives. Engaging in conversations with financial professionals can assist in getting your financial plan on track and ensuring you have the appropriate investment strategy tailored to your needs. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representative of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability. 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AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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