Warren Buffett is certainly rich enough to retire, but at the rate he’s going it looks like he may never do so. The Oracle of Omaha is 90 and shows no signs of slowing down.
While I admire Warren Buffett’s incredible fortitude, personally I would like to start taking it a little easier when I hit retirement age. For me that means golfing constantly and drinking fine wine. For others it might just mean giving up work to spend more time with family and friends.
So how do I use Warren Buffett’s investing method to get rich and retire early? Thankfully it’s relatively simple.
How Warren Buffett started investing
Warren Buffett made his first investment at the tender age of 11. He was working in his family’s grocery store in Omaha, a small city in the state of Nebraska in America’s Midwest. Young Warren spotted a fast-growing stock called Cities Service, an oil and gas firm that supplied small public utility companies. With the help of his broker father, Warren bought six shares at $38 per share.
While initially it dipped to $27, the company’s share price then rose to $40 per share. Warren decided to realise his 5.2% gain almost immediately. What happened next shocked the young boy. Cities Service shares soared to $200 per share. If he had held on a little longer Buffett would have made a 426% gain.
In his eyes this was a huge failure. It would inform his investing method and kickstarted a lifelong obsession.
Buy and hold to get rich
Most UK investors focus too much on short-term price movements. That’s just a fact. But Warren Buffett became a billionaire by compounding slow, steady incremental gains.
Many of the stocks in his Berkshire Hathaway portfolio have been held for decades. Take Coca-Cola. Buffett first bought shares in the drinks giant in 1988 and has held on for 32 years. While Coca-Cola only pays a 2.9% dividend yield, the company has a ‘progressive’ dividend policy. This means it will try to increase the proportion of income it pays out to shareholders every year. It has raised its dividend per share for the past 50 years in a row.
So compound gains are their most powerful when shares are held for a long period of time. Even though I’m in my 40s now, I’ve still got 30+ years of investing ahead of me. This is more than enough time to build serious compound gains.
Instead of realising short-term gains by buying and selling shares frequently, Warren Buffett now tends to hold on to stocks for a very long time. He chooses shares he thinks will grow their dividends too.
Some well-known FTSE 100 companies with progressive dividend policies include Astrazeneca and British American Tobacco. UK investors might be tempted to choose the second of these options for its 8.33% yield today. Astrazeneca, by contrast, only pays a 2.57% yield.
But it’s perfectly possible that Astrazeneca might improve its dividends by a lot more than British American Tobacco does over the next 30 years. I would say there’s more of a future in pharmaceuticals and vaccines than there is in smoking and tobacco products.
Learning investing lessons (like researching carefully, holding for the long term and choosing progressive companies) isn’t always easy. But I think they can help me get rich and retire early better than any other method.