Want to aim for a million from investments? I can’t think of anyone better to learn from than Warren Buffett. The legendary billionaire investor has helped numerous Berkshire Hathaway shareholders to grow their wealth over the decades.
Buffett took control of the investment company back in 1965. And between then and 2021, he’s managed an average compounded annual return of 20.1%.
That’s astonishing by any measure. Let’s think about what a return like that could do for us.
Suppose we manage a 20.1% return from shares every year, and reinvest any dividend part of it into buying new shares. A million would be a plausible target over an average investing lifetime. In fact, we could get there over a surprisingly short period.
Compounding magic
Investing just £100 every month for 10 years would net us approximately £34,600. The original investment would amount to £12,000 of that. So the remaining £22,600 comes from those annual returns compounded over the decade.
And compound returns can make build up surprisingly quickly. Another 10 years at the same rate would take us to £250,000. So starting at age 20 and putting away just £100 per month, we could get to a quarter of a million by 40.
And £400 per month, at the same annual return, could get us our million in 20 years.
Well, if we could equal Buffett’s average returns, that is. And I would not pin my hopes on managing to match him myself. I think even he might be stretched to keep going at that rate in the future.
Beat the index
But I think it does show how following a top investor can seriously improve our long-term investment prospects. Over the same period since 1965, the S&P 500 index provided an average annual return of 10.5% including dividends. That’s still very good, but most fund managers fail to beat the index.
So which key Buffett approaches would I use to aim for a million? Firstly, it’s all about time. And I don’t just mean investing for a long stretch of it. No, he once said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
He also added: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Time and risk
If I put those together before I buy shares, it really helps me concentrate on reducing risk. To do that, I try to learn as much about a company as I can. That’s how it works, how it’s funded, what its defensive qualities are, and more.
Buffett also delights in market slumps. He’s expressed it in different ways — like famously urging us to be greedy when others are fearful. Essentially, when markets are down and he thinks shares are too cheap, he goes in big.
I’ve definitely done better over the years by following Buffett’s advice as well as I can, though I confess I haven’t reached a million. But maybe I might have done so if I’d just put all my money into Berkshire Hathaway shares instead, and left him to do it.
