Buffett’s $300,00 Haircut

Sarah F. Roach

Legendary investor Warren Buffett turned 90 this summer, and he’s still investing for the long term. Because of his storied career, during which he’s amassed a personal fortune estimated to be around $80 billion, reams have been written about his philosophy and advice. I’d like to share one fundamental idea that has served him well. He calls it “The Methuselah Technique.”

Named for the biblical character who purportedly lived 900 years, The Methuselah Technique involves combining a very long-term view of the future (“a long life”), with a successful investment approach. This concept appears to be unknown, dismissed or ignored by day traders, many of them young and inexperi­enced.

At around age 10, Buffett read a book that explained compound interest, and he quickly grasped its signifi­cance. Moreover, he grasped the importance and power of time. He realized, for example, that $1,000 earning 10% per year would become $1,600 in five years, $2,600 in 10 years, $10,800 in 25 years and more than $117,000 in 50 years. According to Alice Schroeder’s biography of him, Buffett told himself, “That’s where the money is!” In his mind, the future and the present merged, and he saw the dollars growing “…as vividly as the way a snowball grew when he rolled it across the lawn.” Appropriately, she entitled her biography The Snowball.

Buffett bought his first three shares of stock at around age 12. Years later, he began his professional career buying small, overlooked stocks, including a failing textile mill named Berkshire Hathaway. His investment selections have necessarily evolved, since today’s Berkshire, given its size, needs to invest very large sums in very large companies. Nonetheless, Buffett has consistently invested with a keen eye to the future value of any investment made today, even at age 90. To the occasional dismay of friends and family, this colored his view of his personal spending as well. As recounted by Schroeder, when Buffett bought his Omaha home for $31,500 in 1958, he called it Buffett’s Folly because “…in his mind $31,500 was a million dollars after compounding.” Amusingly, his family overheard him wondering aloud if he really wanted to pay “$300,000 for a haircut.”

Buffett internalized, as we all should, that the dollar you spend today is not simply a dollar you won’t have to spend one, five or ten years from now. If you combine well-chosen long-term investments with patience and compounding, a dollar you have today could grow to much more than one dollar to spend in the future. After considering future value, you may still opt to buy the big screen TV, new car or, well, haircut, but you’ll do so with a clearer understanding of the true cost involved and the tradeoff you’re making. Many of today’s rapid-fire traders could afford to take a page out of Buffett’s playbook. They may even discover they can’t afford not to.