Warren Buffett is one of the richest people in the world. Often called the Oracle of Omaha, Buffett made his billions by investing in quality companies and holding for the very long term. He certainly didn’t make his fortune overnight. Indeed, Buffett was in his 50s when he first hit the billion-dollar milestone. Since then though, his wealth has ballooned to many hundreds of billions of dollars.
Buffett once said: “I always knew I was going to be rich. I don’t think I ever doubted it for a minute.” This might sound overly confident, but he loves investing and has spent his life mastering his craft. The best thing is, I can follow his same methods and aim to be rich too.
Image source: The Motley Fool
Two things to learn
Warren Buffett bought his first stock at a young age – only 11 years old. But it took him time to learn how to research and value businesses, which made him the investor he is today. So like him, it’s important for me to understand businesses before I start buying stocks.
If I didn’t want to learn about businesses, I could always invest in a fund. This way, a fund manager will make the investment decisions for me – for a fee, of course!
The next key thing I’ve learnt from Buffett is the power of compounding. This is where I earn interest on my interest. In terms of the stock market, if my shares go up 10% one year, and another 10% the next, I’m compounding my returns.
Let’s put some numbers on it. If a £100 stock price goes up 10% in the first year I’d make £10. If the same stock price goes up 10% the next, from £110 to £121, I’ve made £11. I get an extra £1 in the second year, just because of compounding.
A 10% return on top of the previous 10% return is a powerful force if I do this over many years in a row.
Compounding is why it took Buffett over 50 years to amass $1bn, but only a couple more years to make $2bn.
Buying businesses like Warren Buffett
Buffett really only became a billionaire because of compounding. And generating compound interest only becomes very powerful with enough time. That’s why, even without savings at 30, I can start building up my portfolio to earn compound interest and still have time to make some significant gains.
It all still depends heavily on investment performance. A UK government gilt only earns 1.9% in annual interest right now, so it would take a very, very long time to generate significant wealth.
This is where the stock market can be a good choice. It’s higher-risk (after all, companies can struggle or go bankrupt), but I could also earn higher returns.
Warren Buffett has generated his wealth by investing in quality companies listed on the stock market. Once he’s researched the businesses, he aims to hold them in his portfolio for the very long term. This allows compounding to work its magic. He even once said: “Our favourite holding period is forever.”
So I aim to follow his method of buying quality companies and holding them, if not forever, at least for a very long time.
