Money

Be Patient, and Your Wealth Will Explode

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The story of Warren Buffett’s youngest son, Peter Buffett, is an unforgettable one.

In 1977, at the age of 19, Peter received his inheritance early. Warren gave Peter $90,000 worth of stock of Berkshire Hathaway (NYSE: BRK-B).

Peter’s father told him that this would be his inheritance and that he should expect nothing more.

Warren, of course, already had all of his own net worth invested in Berkshire at the time.

But young Peter was an aspiring musician.

He saw the $90,000 as an opportunity to follow his dream.

Peter sold all the shares of Berkshire.

He lived off the proceeds and tried to make it as a professional musician.

His path included moving to San Francisco, where he rented a tiny studio apartment and lived frugally.

He purchased recording equipment, wrote music and perfected his craft.

With the gift of time that the money from selling his stock provided, Peter did make it.

He has released more than a dozen albums and even worked on the musical score for the Academy Award-winning film Dances with Wolves.

But what if Peter had chosen another path?

What if he had instead held on to his shares of Berkshire for the long term?

The numbers are easy to crunch…

When Peter received his early inheritance at the start of 1977, Berkshire Hathaway traded for $89 per share.

Today, with Peter’s father still running the company at age 91, those same shares trade for $484,000.

If Peter had held on to those Berkshire shares that were worth $90,000 when he received them…

Then he would be sitting on an investment worth $490 million today!

If you were wondering, Peter does say that he doesn’t regret selling those shares.

I hope so, but I’m not sure I believe him.

On the other hand, Franklin Otis Booth Jr. chose a very different path…

In the early 1960s, while making a modest living working for a newspaper, Booth met a young lawyer named Charles Munger.

Noticing that recent legal changes had made condominium ownership attractive, the brilliant Munger suggested that Booth should develop condos on a property that Booth’s grandfather owned in Pasadena, California.

Booth said sure, but he would do it only if Munger invested alongside him.

Using mostly borrowed money, Munger and Booth built a 40-unit condo development for $1 million.

Two years later, they had sold all of the units and doubled their investment, realizing a profit of $1 million.

They worked on one more successful real estate development that had similar results.

In 1963, Munger told Booth about an exceptionally smart young man from Munger’s hometown of Omaha, Nebraska.

Booth hopped on a plane and flew to the Midwest. There, he met a still undiscovered Warren Buffett, who Booth immediately recognized was a once-in-a-lifetime talent.

Shortly thereafter, Booth invested $1 million with the young man from Omaha.

Booth wanted Buffett to manage his money as soon as possible and for as long as possible.

The $1 million investment gave Booth 18,000 shares of Berkshire, which equated to a 1.4% ownership position in the company.

Then Booth did nothing with his Berkshire investment for a long time. He let Warren Buffett go to work for decades.

By the time Booth reached age 75, his $1 million investment in Berkshire Hathaway was worth an astounding $1.2 billion.

It was truly one of the greatest investments ever made.

Our Lesson: Give the Market Time

My daughters are teens now.

I asked them to proofread this article for me because I wanted them to see a memorable story that shows the power of compounding.

Peter Buffett wasn’t patient. It cost him hundreds of millions of dollars.

Booth was incredibly patient. It made him astoundingly rich.

After my kids were done reading, it was clear to me that the stories of Peter Buffett and Franklin Otis Booth Jr. had made an impression.

They were sad for Peter and told me that they wanted to be like Booth.

The great news for my kids (and for all of us) is that we don’t need to find the next Berkshire Hathaway to build tremendous wealth over time.

This stock market game is rigged, and it is rigged in our favor.

Over time, the market goes in one direction: up.

It does so at a very nice pace of almost 10% per year on average.

Sure, there will be bumps along the way – but in the grand scheme of things, those bumps are only minor blips.

The recipe for success is simple.

Just get diversified exposure to the stock market, and then give this incredible wealth-generating machine as much time as possible.

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