With a net worth of over $132bn (£105bn), it’s fair to say Warren Buffett knows a thing or two about building wealth. The Berkshire Hathaway (NYSE:BRK.B) CEO is one of the best investors in the business.
Achieving a similar result is nearly impossible for most people these days. But there are some important lessons ordinary investors can learn to try and build significant long-term wealth.
Right place, right time
Part of Buffett’s success comes down to being in the right place at the right time. In its early stages, Berkshire benefitted from a long period of share prices being unusually cheap.
That allowed the company to build a portfolio of stocks that keeps delivering better returns than the bonds owned by other insurance businesses. Things are somewhat different today, though.
Lower interest rates have made equities more expensive. So the opportunity that was there for Berkshire when the company was moving into the insurance business isn’t there now.
Buffett’s success isn’t just down to good fortune, though. The Oracle of Omaha’s approach has stood the test of time and is one investors can still apply today.
Growth stocks
Buffett is best known as a value investor and staying away from overpriced investments is definitely a key component of the Oracle of Omaha’s success. But it’s not the most important part.
According to Buffett, shares in a great business at a reasonable price are a better investment than shares in a mediocre business at a dirt-cheap valuation. In other words, quality matters most.
What makes a quality business? One thing the Berkshire CEO looks for is the ability to earn a good return on the cash invested by the business in inventory and fixed assets such as equipment.
Another is the ability to grow by investing further cash at good rates of return. This usually depends on the company having something that sets it apart from its rivals.
A stock I like
I think Games Workshop (LSE:GAW) is a good example of the kind of stock Warren Buffett might like. It’s too small to interest Berkshire Hathaway these days, but it has a lot of attractive attributes.
The company’s Warhammer franchise is protected by intellectual property rights, which should prevent competition as it attempt to grow internationally. And it earns strong returns on its assets.
The business has around £44m in inventory and £96m in property, plant, and equipment. And it generates £109m in free cash – a 78% annual return.
Investors should be wary of weak consumer spending, especially in China and North America at the moment. Over the long term, though, I think this could be one of the best UK stocks to own.
Investing like Warren Buffett
Berkshire benefitted from some good fortune in its early days. But Buffett’s success isn’t just down to this – if it were, the number of billionaires would be a lot higher.
The more important reason is the Oracle of Omaha’s diligent approach to investing. And this is probably still the best way to build wealth, even if a net worth of £105bn is something of a long shot.
