It is easy to look at billionaire Warren Buffett and find ways in which he seems different to most of us. The reality is, though, that Buffett started out with no savings and no shares. He saved money from a paper round as a schoolboy to make his first moves in the stock market. The rest, as they say, is history – and tremendously lucrative history at that!
If I had no savings and was targeting greater wealth, here is how I would apply the Warren Buffett method to my efforts.
Understanding what investing is all about
A lot of people consider investing as speculation. They buy shares in companies they do not properly understand, hoping the price will go up.
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Buffett’s approach is different. He sees a share as a tiny stake in a company (which it is). So he finds what he thinks are excellent businesses with attractive price tags, then buys their shares with an eye to holding for the long term.
By sticking to areas he understands, Buffett is more likely to know what he is getting into. That said, even the best business can run into unforeseen difficulties, so he always diversifies his portfolio across more than a couple of companies.
Buying and holding
That approach can make money in two different ways (though it might not – share prices can fall as well as rise).
One is an increase in share price. Buffett’s holding in Coca-Cola (NYSE: KO) illustrates this point. He spent a few years building a stake in the soft drinks maker, with the last purchase made 30 years ago (Buffett really is a long-term investor!)
As he said in this year’s letter to shareholders in his company Berkshire Hathaway, his investments in Coca-Cola and American Express “are meaningful assets and also illustrate our thought processes.”
His Coca-Cola shares cost $1.3bn. Now they are worth $25.6bn. Both numbers are big – few people can spend $1.3bn on shares! But the key point is the price growth of 1,969%. If I had bought at the same time as Buffett, even on a far smaller scale, and held until now, I would also have seen the same share price gain.
That shows the possible benefit of buying into a business with a competitive advantage in a market with strong ongoing demand, when its shares are on sale at an attractive price.
Dividend machine
But what about the second way Buffett has made money (and lots of it!) from his Coca-Cola investment?
Dividends are never guaranteed. But Coca-Cola pays them regularly. Indeed, it has raised its dividend per share annually for over 60 years. This year, it will pay shareholders including Buffett $8.4bn in dividends.
The $1.3bn investment now earns him over $700m in Coca-Cola dividends annually. That is totally passive income – all he needs to do is keep the shares he already owns!
Finding great companies to buy into
Coca-Cola has a great business but, like all companies, it faces risks from waning consumer enthusiasm for sugary drinks to high energy costs making production costlier.
Buffett has not bought Coca-Cola shares for 30 years. But I am applying his method now to try and find bargain shares to buy!
