The easiest way to invest like Warren Buffett

Warren Buffett has made 99% of his money since his 50th birthday. Why is this? Stephen Wright looks at the secret to Buffett’s recent success.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Key Points

  • Holding on to businesses is an important part of Warren Buffett's investing success
  • Selling businesses early involves leaving behind the majority of the investment gains

Replicating the huge success that Warren Buffett has had in investing is difficult. The Berkshire Hathaway CEO has an unrivalled skill in identifying opportunities. But there’s a really important part of his approach that investors like me *can* emulate.

Once invested, Buffett likes to hold onto companies for as long as possible — ideally forever — rather than selling them when the share prices increase. This accounts for a lot of the Oracle of Omaha’s investing success. And there’s no reason why I can’t do it too. 

Investment returns

Buffett thinks of owning stocks as having a stake in the underlying businesses. Accordingly, he looks at the cash a business produces as the return on his investment.

Earnings per share (EPS) ($)2012-132013-142014-152015-162016-272017-182018-192019-202020-212021-22
Bank of America0.250.900.421.311.491.562.612.751.873.57
American Express3.894.885.565.055.612.997.917.993.7710.02
Moody’s Corp3.053.604.614.631.365.156.747.429.3911.78

This is why it’s important to hold onto businesses that grow their earnings. Take Bank of America as an example. If I’d bought shares at the start of 2012, I’d have an investment return of $0.25 at the end of the first year. 

At the end of the next year, I’d have another $0.90 to go along with it, taking my total return to $1.95. And by the end of the decade, my investment return would have reached $16.73.

If I’d sold my shares after five years, though, things would have been very different. After five years, my shares would only have produced $4.16. In other words, by selling my shares instead of holding them for another five years, I’d be leaving $12.57 (around 75% of the EPS) behind. 

The story is the same with American Express and Moody’s. In the case of American Express, selling after five years would have involved missing out on 58% of the earnings. And with Moody’s, I’d be foregoing a huge 70% of the earnings. 

Conclusion

Holding on to good businesses, rather than selling them, is an important part of Warren Buffett’s success. Companies that can grow their earnings over time produce much more in the later years than they do in the earlier years. Selling early involves sacrificing most of the investment return.

This is why Warren Buffett has made 99% of his fortune after his 50th birthday. Staying the course with good investments and giving them time to work has allowed him to benefit from the growth of the businesses that he owns. 

Emulating Buffett’s success in the stock market isn’t going to be easy. But there’s no reason that an investor like me can’t follow his lead in holding on to quality businesses and benefitting from the effect that has caused the Oracle of Omaha’s wealth to skyrocket later in his career.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

American Express is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright owns Berkshire Hathaway (B shares). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian man making doubtful face at camera
Investing Articles

Surprise! This monopoly stock has taken over my Stocks and Shares ISA (again)

Our writer has a (nice) dilemma in his Stocks and Shares ISA portfolio after one incredible growth stock rocketed higher…

Read more »

Investing Articles

10.5% yield – but could the abrdn share price get even cheaper?

Christopher Ruane sees some things to like about the current abrdn share price. But will that be enough to overcome…

Read more »

Investing Articles

£9,000 to invest? These 3 high-yield shares could deliver a £657 annual passive income

The high yields on these dividend shares sail sit well above the FTSE 100 average of 3.6%. Here's why I…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

I’ve got £2k and I’m on the hunt for cheap shares to buy in December

Harvey Jones finally has some cash in his trading account and is hunting for cheap shares to buy next month.…

Read more »

Investing Articles

Down 25% with a 4.32% yield and P/E of 8.6! Is this my best second income stock or worst?

Harvey Jones bought GSK shares hoping to bag a solid second income stream while nailing down steady share price growth…

Read more »

Investing Articles

Here’s how the Legal & General dividend yield could ultimately hit 15%!

The Legal & General dividend yield is already among the best of any FTSE 100 share. Christopher Ruane explores some…

Read more »

Investing Articles

Is December a good time for me to buy UK shares?

This writer is weighing up which shares to buy for his portfolio next month, and one household name from the…

Read more »

Investing Articles

Is it time to dump my Lloyds shares and never look back?

Harvey Jones was chuffed with his Lloyds shares but recent events have made him rethink his entire decision to go…

Read more »