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Warren Buffett says to do this if you want to make money from stocks

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close-up photo of investor Warren Buffett
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Warren Buffett is rightly acclaimed as one, if not the, best investor of all time. His company, Berkshire Hathaway, run with business partner Charlie Munger, has stood the test of time and made its owners and investors a fortune.

What’s the secret sauce?

I started building this little snowball at the top of a very long hill. The trick to having a very long hill is either starting very young or living to be very old,” Buffett said at Berkshire’s 1999 annual meeting. 

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The secret sauce to Buffett’s investing style is to think when he invests, that he’s becoming an owner of the business. He doesn’t view shares as abstract things to be bought and sold for a quick buck. Indeed, this article shows six stocks where he has made more than 1,000% return. Shares like Coca-Cola, he has held for decades.

Adopting a long-term mindset and investing only in the very best businesses, helps Warren Buffett to feel the benefits of compounding. That’s when investors earn more and more interest or income each year. Dividends reinvested into buying more shares in a company creates a snowball effect that can produce staggering returns over a long timeframe.

A stock Warren Buffett would like 

I think Reckitt (LSE: RKT), the consumer goods company, potentially fits the profile of a long-term Buffettesque investment. I own shares – and intend to for many more years to come – given the strong brands, international sales, and investment in marketing and branding.

Buffett backed the Kraft-Heinz bid to take over Unilever back in February 2017, so we know he likes consumer goods companies. He also like strong brands, which Reckitt has.

Right now the shares are well down from when they peaked in 2020 – potentially representing a buying opportunity. The main reason for the fall seems to be investors expecting that demand for cleaning products will subside, so there was a Covid boost for Reckitt last year.

Looking longer term, does it matter if cleaning sales normalise this year and into the future? I don’t think so, and now the shares seem pretty fairly valued.

I’ll be very likely to add to my holding with the shares now on a forward price-to-earnings ratio of 18, which is the same as competitor Unilever.

Making money from stocks like Warren Buffett

Beyond the power of compounding I think there are three other lessons from Warren Buffett’s investing career that it’s worth remembering:

  • It’s best to invest in businesses that can be understood
  • Invest in businesses with favourable long-term prospects
  • Investors should be patient and buy when a company’s share price is fair

I intend to follow Warren Buffett’s advice to make money from stocks. My performance is unlikely to come near replicating his, but if it helps me avoid big mistakes and find great companies, then I think it’ll go a long way towards making me a successful investor.

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Andy Ross owns shares in Reckitt. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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