01) November 2021
In the world of investing, age may not be everything
“I am 55 years old. What should be my equity allocation?” This is a question that I frequently encounter during my interactions with investors.
By the way, you could swap the 55-year-old person for a 25-year-old person or for that matter a 70- year-old person and the question remains the same. There is a connection that everybody makes — consciously or unconsciously — between age and equity allocation. I would submit that age is a factor that impacts your allocation, but it is hardly the only one.
I would not expect to encounter this question from any of India’s billionaires; think Ambani, Birla or the Octogenarian Ratan Tata. They too need to make an allocation choice, but it is not related to age. At the other end of the spectrum, India’s poorest (10% of the population as per World Bank, 2019) who are striving to make a living are not really concerned with an asset allocation decision.
I would agree that your level of net worth, level of income and savings and whether you expect a significant change in income and lifestyle after a point in life, say retirement, would have a material impact on that allocation decision. But what if you have enough wealth to see you through your golden years? What if your thoughts are now more about transfer of your wealth to the next generation because your needs are being met? Age, then, is not the sole determinant of asset allocation.
The last week of August saw the 93 rd birthday of Warren Buffett, also known as the Oracle of Omaha. Buffett has his entire wealth almost solely in the shares he holds in Berkshire Hathaway (estimated US $106bn, Forbes 2023)1 . As the guru of value investing, he combines wisdom and wit as very few can. No wonder he can fill an auditorium with over 40,000 people when he conducts his AGM in Omaha, Nebraska.
Buffett’s journey as an investor is a statistician’s delight and I wanted to honour his birthday and shine the spotlight on some remarkable facts about his career.
Did you know that he turned into a billionaire (US $ 1 billion) in 1986 at the age of 56? And that he earned more than 99% of his fortune after he crossed the age of 56! So if you are under 56 and short of your targets, I’d say there is still hope for you. From $1bn in 1986 to $106bn in 2023! This is nothing but the effect of Buffett’s investing skills and letting the magic of compounding work in his favour. His fortune compounded at 13.4% p.a. over that period.
I suspect many investors who currently look at their three-year return in Indian equities (Nifty 50- CAGR 21.06%, Nifty midcap 100 CAGR +34.2% for the three-year period ended August 2023) might be of the view that they could get there much faster given their recent performance. Skill however lies in patiently navigating 37 years of an ever fluctuating and changing economic landscape and market.
Note: If you would like to set your aspirations lower than the starting point of being a billionaire at 56, the data suggests that Buffett became a millionaire at age 302.
How stellar is his track record versus the benchmark index? From December 1987, a year after Buffett became a billionaire, his Berkshire Hathaway stock has compounded at 15.76% p.a. vs. 10.82% p.a. for the S&P500 (TR). That’s an alpha of nearly 5% p.a. over the benchmark for a period of 36 years. Suppose you had invested US$ 1,000 in shares of Berkshire in December 1987, it would be worth US$ 1,94,136 now. And, if you had invested the same amount in the S&P500 index in December 1987, it would be worth US$ 40,388.
The most striking statistic about Buffett’s performance can be found in this excerpt in the Barron Magazine, April 29, 20223:
“Given the enormous gain in Berkshire Hathaway class A shares (ticker: BRK.A), the stock could drop 99% and still be ahead of the S&P 500 index since 1965.
Barron’s calculates that Berkshire shares would have returned 10.3% annually since 1965 assuming a class A price of $4,968, or 1% of the stock’s closing level of $496,800 on Wednesday. That return compares with a 10.2% annualized return for the S&P 500 over the same period.”
One may ask whether Warren Buffet ever faced a drought in his performance. Or what a challenging phase looked like for him. Well, the answer may lie in what I wrote a few paragraphs before: the need to patiently navigate 37 years.
The challenge came during the tech boom of the late 90s. During the five-year period ended June 30, 2000, the Berkshire Hathaway stock (BRK/A) delivered 18.05% p.a. versus 23.76% p.a. for the S&P500, underperforming the benchmark by nearly 6% p.a. However, over the next five years ended June 2005, the Berkshire Hathaway stock went on to deliver 9.18% p.a., when the S&P500 delivered a negative 2.4% p.a. return. There is a timelessness to Buffett’s investment strategy. It has ridden periods of dramatic and abrupt changes and innovations.
Let’s circle back to the topic of age and investment in equity. There is no causation between these two numbers. There is a correlation but there is a wide suite of variables that influence the asset allocation decision and it is not merely based on the investor’s age. The goals, contingency plans and needs are far more critical factors. Today many people have the option and choice of a second career, which could be at similar, lower or significantly higher income levels. That can significantly change your risk appetite.
Further, the reality is that your investment horizon is much longer than you think. India’s life expectancy in 20224 stood at 70.19 years and it is expected to be 81.96 years in the year 2100. So even if you are 50, you should plan your investments for the next 30 years at the least. If health permits, you should also plan a second career for the next three decades.
Let me conclude by recounting my encounter, in 2022, with a nonagenarian family member. He has lived a good and simple life in Aamchi Mumbai. During our conversation where I explained what I did for a living, he left me with a difficult question. He wanted to know what I planned to do for the next 40 years of my life.
Thinking long-term could well be a good starting point!
1https://www.forbes.com/billionaires/
2https://finmasters.com/warren-buffett-net-worth/#gref
3https://www.barrons.com/articles/warren-buffett-berkshire-hathaway-stock-sp500-51651154636
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
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