The best way for me to build wealth over the long term is to spend less than I earn. Well, almost the best way. Because it’s what I do with the savings that really counts, and Warren Buffett could help here.
In my younger days, I always thought finding the best interest rate on offer at a bank was the best option for my savings. Don’t get me wrong, this could still be an appropriate strategy. It’s certainly a ‘safe’ option as this is a guaranteed return, and isn’t subject to price fluctuations when the market is open.
But a savings account has other risks. For one, inflation today is well above the interest on offer at a bank. This means the real return is actually negative. In other words, my savings would lose purchasing power.
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Then there’s ‘opportunity cost’. Simply, this means I’m losing out on potentially higher returns by not investing my savings elsewhere.
Let’s take some inspiration from Warren Buffett to see how I can invest my savings instead.
Warren Buffett’s strategy
Warren Buffett is probably the most famous investor around. He grew Berkshire Hathaway into the behemoth it is today, standing at a market value of about $640bn. Together with his business partner, Charlie Munger, he’s spent decades investing to grow the value of Berkshire Hathaway for shareholders.
I previously wrote about Munger’s influence on Buffett’s investing strategy here. As a quick recap, Munger persuaded Buffett to focus more on quality companies over deep-value businesses selling for less than intrinsic value. A quick turnaround sale could pay off in a big way if the original buy price was right. Buffett often referred to this as ‘cigar-butt investing’ as it was a shorter-term trade.
But there’s another crucial factor to Buffett’s strategy, which again came from Munger’s influence. It’s captured in the following quote: “Our favourite holding period is forever.”
In fact, Buffett has spent his lifetime trying to convince people to invest for the long term. This is the key investment strategy that I wish I’d learnt sooner. It works for Berkshire Hathaway, so I’m sure I can use it too.
Thinking back, if instead I hadn’t looked around for the best interest rate on offer at a bank, I had invested in the stock market, I may have been wealthier for it today.
Where should I invest?
The first thing I should have done is use a stocks and shares ISA. There’s a great article on this here. In short, it’s a way to invest without paying any tax on capital gains and income.
But there are many investing options to consider after opening an ISA. I primarily use growth investing, looking for companies that can be much larger in the future. But I also buy high-yielding dividend stocks to increase my passive income.
One final way I could have improved my wealth is to buy an index fund that tracks the stock market. Or I could have simply bought shares of Berkshire Hathaway 10 years ago and earned an annualised return of 14%, letting Buffett do the investing for me.
As long as I invest for the long term, there’s a good (if not guaranteed) chance my returns would beat an interest rate at a bank.
