Wall Street tells you to invest as early as possible in its mutual funds or whatever it is trying to sell. Just another myth you are led to believe. Investing early does not always guarantee greater wealth. I will try to show that starting at the age of 20 isn’t all that different compared to starting at 30, 10 years later!. Let’s see why.
Wall Street vs Old School Investing
Wall Street proudly boasts that investing in its mutual funds wil yield approximately 10% return. They “forget” to mention that after taxes, commission and fees, the 10% would probably be lowered to 8% or so. But we’ll stick with the 10% in the example I provide later.
However, investing in an Old School style of waiting patiently for great companies at depressed prices and then wait until it reaches its intrinsic value will bring opportunities that can definitely yield 15% and beyond.
The Super Best Investor Club
Four friends all start with $10,000. They have just graduated from high school. As graduating gifts, they each receive a sum of $10,000 from their relatives and friends.
A few assumptions before I move on.
- Wall Street return: 10%
- Old School return: 15%
- The return could be less than or greater than 10% or 15% but we will consider the boundary case since I just want to show the average results
- Each person does not deposit anything more than the initial amount
- Each person invests for 20 years
- (You can download the different scenario calculations here.)
Investor No. 1
No.1 has always been interested in investing. Now that he has the capital, he places it all into a typical Wall Street hyped mutual fund. He starts at the age of 20. He is considered the benchmark by his friends due to his eagerness and early start.
Return after 20 years: $67,250
Investor No. 2
No.2 is a patient Buffett type investor. He has his money in a money market, which grows at 5%. He sees that friend no.1 has started investing and so he decides to study and wait for opportunities. He waits patiently until a good opportunity pops up and then buys it at excellent prices. He averages 15% return from solid investments.
We assume that no.2 only find opportunities every 2 years. He then holds for 3 years and sells, which by then has reached its intrinsic value. He waits another 2 years, holds for 3 years and so on.
Return after 20 years: $79,047
Return difference vs Investor no.1: + $11,773
Investor No. 3
No.3 is even more Old School than investor 3.
His money grows at 5% in a money market.
He usually finds an opportunity every 3 years, and then holds for 5 years. This pattern continues up to year 16. From years 17-20, his return is an industry average 10%.
Return after 20 years: $79,395
Return difference vs Investor no.1: + $12,100
Investor No. 4
No.4 is a late starter. He ejnoyed his life partying hard during his 20’s.
Throughout his 20’s, he had his money in a money market fund growing at 5% for 10 years. Finally, turning 30 and seeing his friends accumulate wealth, he follows the Old School style and manages 15% return for the next 10 years.
Return after 20 years: $65,898
Return difference vs Friend 1: - $1,377
What Does This Tell You?
If you had started investing when you were 16, I’m sure you will benefit. BUT “investing as early as you can” shouldn’t be the default cliche to splurt out when teaching young people or those that want to start investing.
Friend 4 started 10 years later than friend 1, but he was less by only $1,377 after 10 years. The other two friends were not constantly in the market. They were not constantly ‘investing’.
Rather than chasing mediocre opportunities here and there and everywhere, wait patiently with cash on hand until a great opportunity in a great company appears. Invest in great businesses with logical and objective reasoning and analysis, with a large margin of safety and you will trounce the market.
“Investing is most intelligent, when it is most business-like” – Ben Graham
“Invest early” is a myth. Investing in great businesses at the right price is not.
Download Section
Calculation of different return scenarios.
