Stocktake: Buffett’s simplest lesson: the power of compounding interest

Warren Buffett has turned 90, prompting no shortage of articles regarding what investors can learn from his legendary investing career. One of the most important lessons is also one of the simplest – the magical power of compound interest.

Morgan Housel of the Collaborative Fund once noted that more than 99 per cent of Buffett's fortune was accumulated after his 50th birthday, even though his percentage returns were actually much better in the first half of his career.

Buffett began investing at the age of 10; if he had waited until he was 30, noted Housel, his fortune would be 97.6 per cent less than it is today.

Buffett "grasped the power of compounding at the age of 10", notes Wall Street Journal columnist Jason Zweig. "The sooner the rest of us fully understand it, the better off we'll be".

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That’s true, although one cannot help but wonder if Buffett took took things too far. Zweig recounts how the young Buffett used to say things like: “Do I really want to spend $300,000 for this haircut?” To Buffett, minor purchases meant you were forgoing thousands and thousands of dollars in the future because your money couldn’t compound.

There’s a lot to be said for being frugal, but you can go too far. This kind of mindset is good for investing, but is it really good for living?