Work, work, work. More work does not always mean building wealth. So during my working life, I also hope that investing in the stock market can help me as I aim to build long-term wealth.
By learning from highly successful billionaire investors like Warren Buffett, I am hoping to put my money to use and watch it grow.
Could that make me a millionaire in decades to come?
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Long-term outperformance
Buffett has managed to build incredible wealth. The business he runs, Berkshire Hathaway, has seen its per-share market value compound at an annual rate of 19.8% for over half a century.
If I invested £500 a month in shares and achieved that same compound annual gain, I would become a market millionaire in just a couple of decades.
Realistically, I doubt I can match Buffett’s long-term performance. Then again, I do have things going for me that he does not.
Odd as it may seem, one of them is a lack of money! The returns in Buffett’s earlier career were higher than they have been more recently.
The ‘Sage of Omaha’ has repeatedly said he thinks he could achieve higher returns with a far smaller amount of money than the billions of pounds now at his disposal. A small investor can benefit from opportunities that simply are not big enough for Berkshire Hathaway to bother with.
Investing like Buffett
I think taking the Buffett approach to building my shares portfolio could hopefully help me achieve handsome returns over the long term, whether or not it makes me a millionaire in the next couple of decades. To do that, I would apply five investing principles.
First, I would stick to what I know. Only if I understand a business can I assess its prospects and the attractiveness of its current share valuation.
Second, I would always keep my portfolio diversified across a number of companies.
The third principle is about finding great businesses with a competitive advantage. Buffett refers to this a moat. A moat like Coca-Cola’s brand gives a firm pricing power that can translate into large profits.
Buying only at an attractive valuation is the fourth principle I would apply from the Buffett approach. That does not mean only buying at low prices, but it will focus me on purchasing shares when I reckon their intrinsic value is substantially higher than their current price.
Finally, Buffett cautions against doing too much.
Rather than investing in dozens and dozens of companies hoping one of them strikes it big, he prefers to stick to a small (though still diversified) portfolio of what he thinks are amazing opportunities. The idea is to put more money to work on a few great investment ideas rather than taking smaller stakes in a range of merely mediocre ones.
Building long-term wealth
Can I match Buffett’s stellar performance and become a millionaire before I retire by investing £500 a month?
Equalling his track record would be tough, though not impossible. So applying the five Buffett principles above could give me a fighting chance as I aim to build my wealth.
