Edward Quince (EQ): Warren, the growth of Berkshire Hathaway is frequently attributed to the magical effect of compounding. Many investors understand the concept mathematically, but few seem to master it psychologically. Why is time, the exponent in the compounding formula, so critical?
Warren Buffett (WB): The real action from compounding takes place in the final twenty years of a lifetime. For anyone familiar with the basics of compounding, the exponent (time) matters the most. While you can achieve large outcomes with a high growth rate, the crucial element is longevity, meaning you or your portfolio must stay around to enjoy compounding.
EQ: Charlie Munger famously advised, "Never interrupt compounding unnecessarily". How does an investor translate this principle into practical, daily behavior in a world that encourages constant activity and short-term trading?
WB: It requires tremendous patience. We must always remember that the big money is not in the buying and selling, but "in the waiting". I often say, "You can't make a baby in one month by getting nine women pregnant". Growth takes time, and you must resist the temptation to "fiddl[e]" with holdings. This is why I think people's investment would be more intelligent if stocks were quoted about once a year. If you spend all day running your life going from one economic data point to another, you lose sight of the long-term focus.
EQ: But doesn't this philosophy of patient non-action mean missing out on certain quick market gains?
WB: If we insist on a degree of defensiveness that turns out to be excessive, the consequence might be profits that are a little lower than they otherwise might have been. But our aim is to be around for the long run. My sister, Bertie, made no new trades during the 43 years after 1980, retaining only a mutual fund and Berkshire, and she became very rich. That demonstrates that the passage of time, inner calm, and minimizing transactions are required.
The Edward Quince Takeaway
Compounding is the quiet force behind immense wealth, but it requires patience and survival. Adopt a mindset where non-action is the default, and avoid the mistake of interrupting the exponential power of time unnecessarily. Your job is simply to survive the interim chaos so your long-term optimism can succeed.
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