Warren Buffett, Bitcoin, and Compounding


To investors,

We have all heard Albert Einstein’s famous quote that “compounding is the eighth wonder of the world” and “he who understands it, earns it; he who doesn't, pays for it.” This concept sounds great as a theory, but there is something incredible when you actually see it play out in reality.

The most recent example is when I saw Garry Tan tweet this excerpt from The Psychology of Money about Warren Buffett:

This means that Warren Buffett accumulated 99% of his net worth in the second half of his life and 96% of his wealth after he qualified for social security. There may not be any better example of compounding in the financial world.

Now one of the important things that many people miss in this analysis is that Warren Buffett has been fortunate enough to live to 91 years old. If he had passed away in his 60s, 70s, or 80s, the compounding story would never be told to the severity that it is today. Additionally, he took full control of Berkshire Hathaway in 1965 and has remained in control ever since.

The average life expectancy in America is just under 79 years old and the average tenure for a public company CEO is just under 7 years. Warren Buffett has drastically outperformed both of those metrics, which helps him continue to benefit from compounding. As Buffett’s partner Charlie Munger says, “the first rule of compounding is to never interrupt it unnecessarily.”

Here is an interesting angle for you though — In response to the Buffett example, Paul Graham posed the question: “I wonder how much of the increase in economic inequality is due simply to people living longer.

It is impossible to quantitatively arrive at a concrete answer, but there is definitely some anecdotal evidence that would suggest Graham is onto something. The average life expectancy in 1975 was 71.4 years and in 1990 it was 74.8 years. People are definitely living longer.

If you have bad money habits, your financial situation will only continue to get worse the longer you live. The same is true if you have good money habits. The longer you live, the better your financial position. This is ultimately what Warren Buffett understands better than most. The pursuit of compounding over long periods of time is a competitive advantage.

So how does this play out in financial markets?

Over the past 30 years, the S&P 500 index has delivered a compound average annual growth rate of 10.7% per year. This means that if you start with $10,000 it would have grown into more than $211,000 over the 30 year period. Compare this with Bitcoin, which has a compound annual growth rate of 161.4% over the last decade, and you can see why so many young bitcoin investors are outperforming their stock investing peers.

These data points made me think about an important piece of advice that a well respected hedge fund manager once told me — most of your financial returns will come from the markets you select to invest in, rather than the actual securities you decide to hold. Another way to think about it is through the lens of entrepreneurship advice “When a good team meets a bad market, the market wins. When a bad team meets a good market, the market wins.”

So much of compounding is predicated on the idea that a high rate of compounding will continue for decades. If you’re successful in finding one of these markets, the challenge won’t be in making many good decisions, but rather in having the discipline and emotional control to avoid making any decisions at all. This is ultimately where I think bitcoin is at the moment. It continues to compound at an impressive rate. You just have to be patient enough to outlast everyone who can’t think long term.

Hope you have a great Tuesday. I’ll talk to everyone tomorrow.



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Elon Musk Named Time’s Person of the Year, Says Crypto Unlikely to Replace Fiat: Time Magazine named Elon Musk its Person of the Year for 2021 on Monday, and in an interview with the publication the world’s richest person said he “doubts that crypto will replace fiat currency.” Time called 2021 “the year of Elon Unbound,” given the many notable statements, actions and accomplishments of Musk, the CEO of Tesla and SpaceX. Read more.


Nick Huber an Entrepreneur, Investor and the founder of Sweaty Startup. He's built a great portfolio of self-storage facilities and service businesses.

In this conversation, we discuss real estate, inflation, cash flow businesses, and how young people can get started today.


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