You might not have ever heard of Shelby Davis.
For those who aren’t in the know, Davis is one of the greatest investors who ever lived. Many consider him second only to the Oracle of Omaha himself, Warren Buffett. (Interestingly, both men built their fortunes roughly the same way, investing heavily in insurance stocks and holding them for decades.)
As D.Muthukrishnan noted in a tweet this past week, Davis managed to turn $50,000 into $900 million, averaging 23.2% annual returns for the better part of five decades.
Shelby Davis started investing only at age 38 with $50,000. Died at age 85 with $900 million. 23.2% annual return for nearly 5 decades.
Shelby Davis is considered second greatest stock investor after Warren Buffett.
Starting late is not a big liability, provided you live long.
— D.Muthukrishnan (@dmuthuk) November 30, 2020
But I take issue with one of Muthukrishnan’s points. Davis started investing relatively late, at age 38, which led Muthukrishnan to the conclusion that “starting late is not a big liability, provided you live long.”
Let’s start with the obvious. Most of us will never generate the kinds of returns that Davis enjoyed. We’re talking about one of the all-time greats, someone who can go toe-to-toe with Buffett.
I wouldn’t be surprised if people talk about my friend Adam O’Dell the same way in another few decades. He’s certainly putting together a formidable track record of his own. (You can learn more about Adam’s methods in his Millionaire Master Class here.)
But the fact remains that most investors can’t start late and then catch up by generating gargantuan returns. That’s a hope — not a plan.
Secondly, Muthukrishnan is “correct” when he notes that starting late won’t kill your nest egg assuming you live long.
But how valuable is money when you’re ancient and too frail to spend it on anything worthwhile? I’d rather be sitting on a multi-million-dollar portfolio in my 50s or 60s, when I should have a few decades to spend it in style, than in my 90s when I’m napping in a rocking chair.
The No. 1 Investing Asset: Time
Earlier this week, I recounted Richard Russell’s “Rich Man, Poor Man” essay in which he compared a young man who started investing in his IRA at 19 and stopped at 25 and a slightly older man who started investing at 26 and continued to invest for the next four decades of his life.
Due to the compounding effects of returns, the first young man — who invested for only six years — ended up with a larger nest egg.
I re-ran the experiment with modern assumptions of lower annual returns, and higher contribution amounts to the IRA, but the results were similar. With my assumptions, the 19-year-old had to continue until 38 (ironically the year that Davis started investing) in order to beat the 26-year-old who continued to invest until age 65. Starting a few years earlier shaved DECADES off of his required savings.
You know what they say about “assume.” It makes an “ass” out of “u” and “me.” When we invest, we should take all assumptions of returns with a large grain of salt. But here’s the lesson to take from all of this:
It pays to start early.
If you’re reading this, you may be a lot like me. You barely remember what it was like being 19. The “starting early” ship sailed a long time ago.
But it’s not too late for your kids or grandkids. In lieu of another toy or a new smartphone this year for Christmas, open a brokerage account for your youngsters and teach them a little something about investing and compounding.
It will be the best gift you ever give them.
Money & Markets contributor Charles Sizemore specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
Follow Charles on Twitter @CharlesSizemore.