Warren Buffett is among the most successful investors of all time. Over his career, he’s amassed a fortune worth over $100bn. As such, it’s no wonder that many investors hang on the Berkshire Hathaway CEO’s every word.
Understandably, 2023 has been a tough year for families up and down the country. With inflation pushing Britons to the limit, many families have undoubtedly had to dip into their savings to make ends meet.
So what if we’re starting with nothing and how can we build wealth in 2023?
Solid groundwork
Before starting an investment portfolio, it can pay to take care of debts. This is a Buffett mantra that he’s advised on several times.
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks,” he once wrote in a letter to shareholders.
There are a few analogies here. A “chronically leaking boat” refers to those living paycheque to paycheque. “Patching leaks” refers expensive forms of financing.
At this point, when debts are taken care of, it becomes easier to commit to regular investment. Of course, we’ll want an easily accessible buffer fund. But once established, it’s time to start an investment journey.
Portfolios benefit from regular contributions — often monthly — allowing investors to smooth out the peaks and troughs of the market. From a little as £5 per person per day, a couple could put £300 a month towards a potentially life-changing portfolio.
A commitment for the long run
Buffett invests for the long run. He rarely takes short positions. And this is what building wealth is all about. Long positions allow us to benefit from the compounding of interest and returns.
Buffett once said: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
We may not have his resources, but we too benefit from compounding by reinvesting our returns, often in the form of dividends, every year. It may not sound like a winning strategy, but the longer I leave it, the stronger the growth becomes. That’s because I’m earning interest on my interest.
If we assume an 8% annualised yield and monthly contributions of £300, after 25 years, a portfolio can go from nothing to being worth £285k. It’s worth noting that 8% is a modest yield and, as an investor myself, I increase my contributions in line with inflation.
Going for quality
Unfortunately, no investment strategy is guaranteed to deliver results. But if we pick the right stocks, we stand a better chance of actualising our objectives.
Buffett tells us to pick quality stocks and to buy them at a discounted price. His pivot, over time, from deep value to quality is perhaps best encapsulated in this quote: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
For Buffett, that means US stocks like Apple. For me that means GBP-denominated companies like Barclays and Haleon.
