Warren Buffett, the fourth richest person on earth who has a net worth of $62.5 billion, became famous for one reason, and one reason only.
It was his ability to make excellent long-term investments which enabled him to grow $10,000, which he had when he graduated college, into the huge fortune we know today.
Despite what you may think however, what many investors probably aren't aware of, is that over $60 billion of his money was generated after his 60th birthday.
How?
Compounding returns, that's how.
In this must-see YouTube video, Buffett explains how a $40 investment in a share of The Coca-Cola Company (NYSE: KO) when it first listed on the stock exchange, with dividends reinvested, would be worth $5 million today!
Of course, hindsight can be a great thing (depending on who you ask) and, given the chance, every one of us would've bought those shares in Coca-Cola for just $40.
Onwards and upwards
$40, back in 1919, was a BIG investment. And, to many Australians, $10,000 is a considerable amount of money, even today.
But you don't need to be rich to capitalise on the power of compounding returns. In fact, our ability to tap into its potential for significant wealth generation is, right now, more real than ever before.
For example, by using the Smartmoney compound interest calculator, $10,000 invested today at 12% per annum, with dividends reinvested, can turn into over $2.89 million in 50 years.
Although 50 years is an investment timeframe too long for many of us. By reducing the timeframe to 30 years and adding $1,000 to your investment portfolio per month, it's possible to turn our original $10,000 in over $3.195 million.
How you can invest like Buffett
Investing like Buffett is simple, but it's definitely not easy. The hardest part is mastering our emotions and being cool under pressure, when everyone else is running for the exit. And although Buffet has done better, the next hardest thing is achieving a 12% return, on average, every year.
With big dividend stocks like Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) it appears Australian investors can achieve over half of that yearly return with ease. However it's not that easy and Warren Buffett considers much more than a company's ability to pay a dividend before making an investment decision.
