Warren Buffett is often regarded as the most successful investor of all time. He had an annual rate of return of 20% per year between 1965 and 2012 and is currently the third richest person in the world. But despite Buffett’s publicity, there are investors who actually have had a better track record. Enter myself. Just kidding. It is quite ridiculous how microscopic my investment knowledge and experience is compared to Warren Buffett’s. What I meant to say is enter Carl Icahn. Icahn earned an average annual return of 31% for his fund between 1968 and 2011. This is remarkable.
I can actually become a billionaire?
Ichan’s 31% rate of return got me thinking of some possibilities. The title of this blog “Quest for Billions” is not referring to a dollar figure. It is a metaphor explaining that being smart with money at a young age will create more freedom and options later in life. But hold on. If I can be as successful as Carl Icahn at investing, maybe I can become a billionaire too. I decided to run some numbers…
Let’s say I am going to start investing from scratch. Assume that I am a disciplined person who is able to invest $5000 every year from now on. Assuming Icahn’s 31% annual rate of return, I will be a millionaire by my mid-thirties, have over a hundred million by my early fifties, and be a billionaire in my early sixties. MY QUEST FOR BILLIONS WILL BE ACHIEVED! Thank you compound interest!
So it turns out everything you have read up until this point was a daydream. Damn. I was just getting to the part of what I was going to buy with my billions…
The reality is, I will never be as successful at investing as these legends. A 31% average annual return is far beyond achievable for me. Actually, it’s impossible. I am a passive investor using index funds. I will match market returns, but will never beat them. You should not expect these types of returns either. Consistently beating the market returns is extremely difficult. Figures like Buffett and Icahn are the best in the world in what they do. Expecting to beat them would be like expecting to beat LeBron James one-on-one in basketball. You might make a lucky basket to go up 3-0 in the beginning, but regardless of how good you think you might be, you will not win over the course of an entire game.
Remember WHY you are investing in the first place
A billion dollars would be nice, eh! Well yes, but it is important to remember why you are investing in the first place. Make sure you are investing for a clear purpose and goal. It is so easy to get fixated on continuing to grow your wealth. The more money you have, the more it compounds, making you even richer. No matter how much money you accumulate, you will always want more. But having a billion dollars in your bank account is just a number if you are not using it to pursue your goals.
What your goal might be is very personal to your situation. For some it might be early retirement. For others it may be buying a dream house. Maybe you want to travel the world for an extended period of time. I can’t tell you what your dreams are. But do not lose sight of WHY you are investing in the first place.
So it turns out that there is an astonishingly small chance that I will be a billionaire in my lifetime. Damn. But that is ok because I do not need billions of dollars to have billions of options in my life.