The Psychology of Money Chapter 4: Confounding Compounding

At the time of Housel’s writing (2020), legendary investor and businessman Warren Buffett was 90 years old, and worth $84.5 billion. 40 years prior, when he was 50, he was worth “only” $0.3 billion – or 280 times less. And $81.5 billion of his $84.5 billion net worth came after his 65th birthday.

Now in 2025, one month from his 95th birthday, his net worth is estimated to be $142 billion. So, what’s Buffett’s secret? According to Housel, “Warren Buffett’s skill is investing, but his secret is time.” Buffett’s investment journey began, believe it or not, when he bought his first stock at 11 years old. He lived frugally, made good investment decisions early in life (see chapter 2 – “good” investments meaning those that ended with a positive return), and by investing his surplus (see chapter 3), got to a net worth of $9.3m in today’s dollars by the time he was just 30 years old. Housel calculates that Buffett’s net worth has grown an average of 22% per year. If 22% annually got Buffett to $84.5b (and now $142b), could you imagine if someone was able to earn 66% annually on their money?

This is the story of Jim Simons, who ran the hedge fund Renaissance Technologies. Its famous Medallion Fund has done just that – 66% average returns since 1988. Would you be surprised that Simon's net worth at the time of Housel’s writing was “only” $21b, or a quarter of Warren Buffett’s? Why so much less with nearly 3x the return? Again, Buffett’s not-so-secret: time. Simons was born just 8 years after Buffett, but didn’t hit his investment stride until his 50s. 1988 to 2020 is “only” 32 years, less than half of the time Buffett had his lesser but longer tenured average returns.

Comparing these two snippets from Buffett and Simons demonstrates the difference between linear and exponential growth.

An example in numbers, with a 10% annual growth of $100, with no other money added.

• Year 1: $110

• Year 2: $121

• Year 10: $260

• Year 30: $1,745

• Year 45: $7,289

Year 2 has not just another $10, but another $11, since the $10 of growth from year 1 now itself is growing at 10%. This is the magic, the secret of compounding. From age 22 to 67 is 45 years - a typical working life period. Linear growth would have your $100 turn into $550. Instead, exponential growth gives you an extra $6,739, or 674%.

Housel warns, “The danger here is that when compounding isn't intuitive we often ignore its potential and focus on solving problems through other means. Not because we're overthinking, but because we rarely stop to consider compounding potential [...] The most powerful and important [investment] book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.” A chart that looks something like the one below, matching the green exponential line above rather than the flat, blue linear one. Up and to the right.

For our clients who might notice that their investments don’t return 66% annually, I have a few notes below. But for now, I’ll end where Housel ends this chapter – an invitation to read the next, which explores the tragedy that follows when we try to duplicate eye-popping results in investment returns and in life.

Until next time, happy reading!