Warren Buffett's Secret to Getting Rich Is Simpler Than You Think

Warren Buffett is an investing legend. The CEO of Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) is a self-made man who was born in the teeth of the Great Depression, and his fortune is the product of brilliance, patience, and time. And although it's hard to live up to Buffett's investing prowess, patience and time are certainly easier to come by.

Buffett's most famous quote is probably the one telling investors to "be fearful when others are greedy, and greedy when others are fearful." It's a timeless lesson that certainly applies to the euphoric bull market in 2021 and the sell-off we are in now. Yet it's hard to relate to someone who is one of the richest people in the world and can afford to lose tens of billions of dollars and still be fabulously wealthy.

That's why I would argue that a different Buffett quote is far more applicable to the average investor. That quote is: "time is your friend; impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market."

Here's why this kernel of wisdom can help make you rich.

Image source: Getty Images.

Avoid the siren song of impulse buying

Investors today are at a disadvantage to when Buffett first started out. Instant access to information and droves of quantitative processes makes it challenging to uncover hidden gems. Buffett spent decades investing during a time when there were more unknowns, there was no internet, and finding stocks that were extremely discounted relative to their book value or earnings was more common. 

However, investors face an even bigger disadvantage today -- noise. Buffett specifically decided to set up shop in Omaha, Nebraska, far away from Wall Street, so that he could stick to his process and not be influenced by distractions in New York. Today the siren song is louder than ever. Stories of folks getting rich on meme stocks, obscure cryptocurrency coins, or any number of random ways are all around us, which can cloud judgment and lead to poor decision-making. Buffett put it well during one of his annual shareholder meetings when he warned that "the monetization of hope and greed is a way to make a huge amount of money." Wall Street has many ways it can profit from volatility and impulse. But time and patience can be equally powerful weapons that are at the disposal of the retail investor. It's just that many folks choose not to use these tools.

An investor's best friend

Picking great stocks is one way to achieve outperformance. But at the end of the day, beating the market in any given year means little more than bragging rights. Rather, getting a relatively average return over time is where the real money is made.

To illustrate this example, let's take three different people. One is age 25, the other is age 40, and the other is 55 years old. The 25-year-old has $0 already saved, the 40-year-old has $250,000 saved, and the 55-year-old has $1 million already set aside. All three people invest $10,000 annually in a retirement account and earn an annual return of 10% on their savings until they are 75 years old. Which investor has the most money by age 75?

The answer is the 25-year-old, even though that person was broke when they start investing.

Source: Calculations by the author using Calculator.net.

Time is more powerful than outperformance or starting with a lot of money. It is truly staggering to think that someone who simply saves $10,000 a year for 50 years at a return of 10% per year can be incredibly wealthy by age 75. We're talking generational, life-changing wealth.

The power of saving

Now, a common rebuttal to this example would be a lack of time or an inability to save as much. So, let's use a different example. Let's say a person is only able to save $500 a month, or $6,000 a year. And they can only do that for 15 years. Well, that person would still have $251,774 by the end of the 15-year period -- a substantial amount of money with a pretty doable savings plan.

The lesson here is that habitual saving and time are really the only tools you need if you want to be rich. We often assume that idols like the Oracle of Omaha got rich by beating the market and making some incredible investments. That's partially true, as Berkshire Hathaway produced a compound annual gain of 20.1% versus 10.5% for the S&P 500 with dividends reinvested.

However, if you began investing in 1965 (when Berkshire Hathaway started) with $0 already saved and invested $10,000 annually into the S&P 500 through a retirement account, you would have around $25.4 million at the end of 2021. And that's with only saving $560,000 in total. The ability to turn $560,000 into over $25 million with little to no work seems like magic. But it's not. It's just the power of compound interest doing its thing over time.

It's very unlikely that regular investors will become multi-billionaires like Warren Buffett. But it's very likely that you and your family can become multi-millionaires if you incorporate the power of compound interest into your life.