Can Warren Buffett make me a millionaire? Well, I don’t mean personally. I’ll likely never speak to the man. But his method for investing is very easy to follow and I could use it to aim for the million-pound mark.
If I hit that target, I could withdraw 4% a year to give me a £40k second income. I’d love to have that much rolling in each year. And I’m not sure there’s anyone better than Buffett to help me get there.
He’s a billionaire, sure. And he got there through investing in the stock market, for the most part. But even that doesn’t do justice to his track record. Even £5,000 invested in his company in 1983 would turn to £635k by 2013. I’m not expecting to earn as quickly as that, but it shows how good his method is.
Buffett’s strategy is simple. He follows ‘value investing’, one of the most tried and tested ways to build wealth in stocks.
Ups and downs
While there are a couple of nuances (that I’ll get to in a second), at its core, he likes to invest in good companies and hold them for a long time. Simple stuff. And yet people love to find ways to complicate it.
Day trading is one example. This way of buying stocks is almost the opposite of Buffett’s approach. A day trader looks at charts going up and down rather than reading about a company. He might buy one morning, then sell in the afternoon.
Studies have shown that consistently making money like this is near impossible. The trading fees mount up too. I know more than one person who has lost a small fortune trying to day trade.
Instead, Buffett looks for a handful of quality companies. The time isn’t spent looking at charts going up and down, it’s spent researching, looking at things like cash flows, debt, dividends, and returns on capital. Research like this sorts the wheat from the chaff.
When he finds a great company, he invests in it for a long time. This smooths out any short-term ups and downs. If the firm is as good as the research suggests, then it will offer market-beating returns over the long run. One of his past choices was Coca-Cola. No surprise that turned out to be a winner.
He’s not so stubborn that he never sells though. Sometimes companies change. Sometimes he makes a mistake. More broadly, investing isn’t risk-free. Even the best can make mistakes or lose money.
Second income
There are ways to find these companies without doing all the research yourself. Of course, The Motley Fool offers one avenue. I can use the expertise of others to help me spot a diamond in the rough.
Another option is to invest in total market index funds. This way, I’m guaranteed to get all the best companies. I get the worst ones too, of course. But the average tends to be pretty good.
So what does this look like in action? Well, Buffett achieved near 20% returns for many decades but I’ll work with a more modest 11% returns.
At that return, a £400 monthly investment takes me past the £1m mark after 30 years. Not bad. And once I’ve done that, I can start withdrawing to receive my £40k second income.
