One hundred dollars invested in Berkshire Hathaway in 1965 would have grown to more than $2.8 million by the end of 2020.
Warren Buffett’s holding company is the most impressive long-term compounding machine in history, increasing in market value at 20% per year for nearly 6 decades.
Compounding is a wonderful thing but it can also become an unhealthy obsession if you view every financial decision through that lens.
In Buffett: The Making of an American Capitalist, Roger Lowenstein tells a story from Buffett’s friend and former business partner Katherine Graham when she was publisher of the Washington Post.
Graham was in the airport with Buffett and needed to make a phone call from a payphone (remember those?). She asked Buffett for a dime (which was the going rate for a call at the time). Buffett grabbed a quarter from his pocket and walked off to get change from a cashier.
Graham snapped at him, “Warren, give me the quarter!”
Buffett was so stingy he wanted to give her exact change for the call and not a penny more.
There was another story from the book where Buffett complained to a friend about his wife purchasing $15k of new furniture for their home. He told the friend, “Do you know how much that is if you compound it over 20 years?”
I’m not going to defend extravagant furniture purchases but that’s not really the point. If you’re always worried about the future value of your money, it becomes much harder to enjoy the present value of your time.
Shelby Davis isn’t a household name like Buffett but his investing track record is almost as impressive.
Davis quit his job at age 38 in the late-1940s to become a full-time investor. His timing was impeccable as the stock market was about to enter one of the great bull markets of all-time. His timing was fortuitous but Davis was also a fantastic stock picker.
Sticking mainly to insurance stocks, Davis managed to turn $50,000 in 1947 into $900 million by the time he passed away in 1994.1
Like Buffett, Davis was a compounding machine. Like Buffett, Davis came from the value investing school of Ben Graham. And like Buffett, Davis was noticeable cheap for being so rich.
Buffett scoffed at buying expensive furniture for his wife as he did the math in his head about lost future gains from compounding while Davis gave the exact same speech to his grandson…about a $1 hot dog. He refused to buy it for the boy.
He also told his children they could only have a swimming pool if they dug the hole themselves.2
Those are relatively small things though. Once the sums became large enough, the money created a rift in the family.
In his book The Davis Dynasty, John Rothchild recounts a fight between Davis and his daughter that made it into the pages of the New York Daily News in the early-1960s:
In the early 1940s, he funded each account with $4,000-surely not a sum that would sap anybody’s future self-reliance. By 1961, as the New York Daily News reported, each “$4,000 acorn had grown into a $3.8 million oak.”
Davis wanted to give a gift to Princeton, his alma mater, and he decided the best way to fund the gift was to demand that his daughter, Diana, sign over her entire fortune. (Diana wanted to marry someone Davis didn’t approve of.) Diana naturally objected, and Davis, with no legal recourse, tried to force her hand by hiring a PR firm to portray her as a greedy ingrate in the New York tabloids. “I fear what Diana needs is a good spanking,” Davis told the press.
Diana fought back in the media and the press took her side, but she and her brother were humiliated. They eventually agreed to allow their father to donate all but $1 million of each of their inherited fortunes to end the public squabble, but the family relationship never fully recovered. Money does not always buy happiness.
Davis was so good at compounding money in the stock market that he turned a few thousand dollars into millions of dollars in his children’s trust funds. And when he found out his daughter was marrying someone he didn’t approve of, he tried to use that money as leverage.
Listen, money is great and all but when it begins to impact your family, what’s the point? Is it really worth it?
Hetty Green was widely known as “the richest woman in America” during the Gilded Age. Despite acquiring a fortune as a financier at the same time as Carnegie, Rockefeller, Morgan, and Gould, the Guinness Book of World Records named her the “greatest miser” in the world.
A renowned cheapskate who often wore one piece of clothing until it was worn out, Green looked for ways to cut corners at every turn.
Although she could afford to pay for the best medical care, Hetty would bring her son to a free clinic dressed in tattered clothes to avoid paying for healthcare.
In Green’s biography, Janet Wallach wrote, “For her to even think of money when her son’s well-being was at stake was inexcusable, except to say that Hetty Green never thought of anything without evaluating its cost, and never received a bill that she did not question.”
Money can provide many things — comfort, peace of mind and convenience. But it can also provide stress, jealously and resentment.
Creating vast sums of wealth often comes at a cost.
Entrepreneur Felix Dennis explains in his book How to Get Rich:
Never yet have I met a self-made rich man or woman whose family or personal relationships were not plagued by the burden of creating a fortune, even a small fortune. A rocky marriage; lack of time spent with their children; the substitution of expensive gifts to repress guilt created by their frequent absences from home; the concern that their children have grown used to privilege and are consequently slacking in their education or lacking in ambition—all of these come as part and parcel of self-made wealth.
There is no escape, although each of us believes we can be the exception that proves the rule. Is this a price you are prepared to pay?
It’s fun to daydream about creating enough wealth to become one of the richest people in the world.
Just remember there are always trade-offs with these things.
Even some of the richest people on the planet have awful relationships with money.
My Persona Finance Mentor
1Davis did like to use margin for his portfolio but no matter how you slice it this is an impressive track record that has gone relatively unnoticed by the investing public.
2After two straight weekends of digging his sons finally hit enough bedrock to make it impossible to break through so Davis brought in some professionals to take over with a bulldozer. I actually don’t mind this one if it taught a good lesson.