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Can Compounding Like Buffett Save More People?

It might seem obvious that the best way to make a difference in the world is by giving back. You earn money, pay your bills,  and save some for a rainy day. From time to time, you donate some of your income, and make a difference to the needy, whether humans, animals, or birds of prey - whatever your preferred cause.

But what if the best way to help more people, make a bigger impact in environmental issues, support jungles to thrive, and save more trees is not to give but to hoard your wealth? This counter-intuitive logic was the subject of debate between Warren Buffett and his philanthropically-minded first wife. But who was right?

When Buffett had already amassed millions of dollars, his wife argued that he should donate money to those in greater need. The marginal benefit to Buffett and his family was almost zero for every additional dollar he hoarded. After all, he had all the money he needed to take care of his family for generations to come.

But Buffett argued differently. He looked at donating money now as an opportunity cost which could have a bigger impact later to affect and impact even more people. What Buffett rationalized was that his skill was in creating wealth. And he believed he could create wealth faster, better, and more predictably than most anyone else.

Time proved he was right. If you examine how Warren Buffett got so rich, the answer is by demonstrating extreme rational in the face of emotional adversity in addition to a massive knowledge bank to assess and evaluate prime investment opportunities.

So, Buffett looked at investing for the long-term as a way to make an even bigger difference in the future than today. It boils down to the simple question. Is it better to donate $100 today or $1,000 in ten years?

Buffett’s wife argued it’s better to give the $100 today because people in need require the money right away. If one person could be helped today, Buffett argued that two or more people could be helped in the future because $100 today might be equivalent to $200 in ten years, but if he could produce more than $200 in accumulated wealth then he could in fact help a greater number of people down the line.

So, who is right? Buffett or his first wife? If you were to look at the carnage following an earthquake or hurricane, and you see people in dire need of assistance, it’s hard not to be moved by the heart-wrenching images and side with his wife.

On the other hand, if you believe the crises happen and will always happen, how do you not argue rationally that it is better to help even more people in the future than fewer people now?

People have fervent views one way or the other. Buffett could never be persuaded to his first wife’s point of view and his wife could never be persuaded to his perspective. So, you may have a strong perspective one way or the other but whatever your viewpoint you can be certain that another person feels vehemently but oppositely.

For Buffett, the debate was resolved in his favor. He kept compounding wealth, kept growing his fortune, and ultimately contributed massively to the Bill and Melinda Gates Foundation in one of the largest philanthropic donations ever recorded in history.

For you, maybe the answer is a little of both. You could donate some money in the immediate term to causes you care about and you could save up using an automatic approach, such as Betterment, which is a robo-advisor, which allows you to bucket savings. For example, one bucket could be retirement but another could be philanthropy whereby you end up allocating some of your savings to giving back to others down the line.

In the end, maybe a black and white viewpoint isn’t the right answer but a little grey is best. For Buffett, he could build wealth faster than most others so the black and white perspective may make sense but for most other people who would do well simply to track the performance of the markets, a little giving now and a little later might be the best of both worlds.

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