Legendary investor Warren Buffett is not famous without good reason. In his lifetime, the so-called ‘Sage of Omaha’ has earned billions of pounds by making smart moves in the stock market.
By following some of Buffett’s approach, could I put £1,000 into the market and turn it into £100,000?
Buffett has certainly had phenomenal success. £1,000 invested in his company Berkshire Hathaway back in the 1960s when he bought its shares would now be worth around £70m!
If I had £1,000 to spare today, I could consider investing it in Berkshire Hathaway. But an alternative would be to build a portfolio of shares I select myself, using some of Buffett’s investing wisdom.
Doing that, I think I might be able to turn £1,000 into £100,000 (at that rate of return, I could turn £10k into a million pounds).
Here is a trio of Buffett moves I hope can help me build wealth.
1. Look to the long term
Buffett has said that his favourite holding period for a share is “forever”.
If he thinks a great business has strong prospects he is typically in no rush to sell his holding.
As a believer in the long-term approach to investing myself, I think that makes sense.
2. Compounding to build wealth
To illustrate why a long-term approach can be so powerful in building wealth, I would point to the example of compounding.
Compounding basically means reinvesting dividends and capital gains to buy more shares. If I compounded £1,000 at 15% annually, it would have turned into £100,000 after 34 years.
Within just five more years, it would double again to over £200,000. After 51 years, the £1,000 investment would be worth over a million years.
It is no coincidence that Buffett compounds his gains rather than paying out dividends to Berkshire Hathaway shareholders. That is one of the reasons he has achieved such phenomenal stock market success.
3. Making a few brilliant moves
Buffett has achieved more than a 15% return many years – sometimes much, much more. In fact, from 1965 to last year, the compounded annual gain in Berkshire Hathaway’s per-share market value was 19.8%.
But that does not mean it is easy to hit such a performance level. How has Buffett managed to elevate his compound annual return, compared to the lower levels more common among many investors?
The answer is deceptively simple. He has avoided lots of mediocre investments that might have made him money but still dragged down the overall performance of his portfolio. Buffett’s incredible performance has largely been driven by concentrating his money in a limited number of superbly chosen investments.
Not all his choices have worked out. Like any investor, Buffett has made mistakes. But despite that, his track record is exceptionally strong. Partly that is because he has focused on doing less not more, but doing it very well.
Investing like Buffett
What is right for Buffett is not necessarily right for other investors. His area of expertise is different to mine, for example.
But at the level of broad principle not specific investment ideas, I think all three of the approaches above could help me invest more successfully over time.
