Why would I look for retirement inspiration from a man still going to the office every day in his nineties? If that man is Warren Buffett, the answer is that he has a wealth of investing wisdom that has made him a billionaire many times over. If that wisdom can help me retire early that sounds good to me, even if the great man prefers to keep clocking in.
Here are five steps from the Buffett approach I think could help me retire early.
1. Long-term focus
Retirement planning can last for decades, which makes it particularly well-suited for the sort of investing timeframe adopted by the ‘Sage of Omaha’.
Many investors get carried away with today’s trends. That can be profitable in the short-term. By contrast, Buffett looks to what products or services he expects to see attracting ongoing demand decades from now when choosing shares to buy. Hopefully, that can help a company keep rewarding its shareholders for decades to come.
2. Look for cash generative industries
One of the characteristics Buffett looks for when investing in companies is an ability to generate large amounts of cash that can be distributed to shareholders.
That may sound obvious – but actually, a lot of companies do not generate much spare cash. For example, some capital-intensive industries typically need to reinvest a lot of the money they make into keeping their equipment and premises up to date. Others spend it on expensive marketing.
The benefit of a company generating a lot of free cash is that it can be paid out as dividends. Owning shares that pay juicy dividends could help me hit my retirement target sooner.
3. Buffett waits for great not merely good
There are often some good investment opportunities available – but that is different to finding great ones. That difference may sound small. But, over time, the returns from amazing companies can significantly outperform that from merely good ones. Buffett’s track record illustrates that.
I reckon having the patience to wait for outstanding investment opportunities could help me reach my retirement target earlier.
4. Spreading risk
Some people build up an impressive retirement pot – until its value falls. Overconcentration in just one asset leads to all of their retirement plans being delayed.
Even the best business can do badly sometimes. Buffett responds to that risk by diversifying his portfolio across a range of industries and companies. For example, although he raves about Apple, his biggest shareholding, he also owns tech rival HP.
5. The miracle of compounding
Buffett has built his Berkshire Hathaway powerhouse by reinvesting the proceeds from investments into other investments. That is known as compounding and can help total assets grow faster.
Imagine my retirement portfolio comprises £50,000 worth of shares with an average dividend yield of 5%. If I simply took the dividends as cash each year, after 20 years I would have doubled my money to £100,000. If I compounded the dividends, I would hit that amount six years earlier.
That example presumes a constant share price and dividends which, in practice, may not happen. But it underlines how compounding like Buffett just might help me shave years off the time it takes me to hit the financial goals for my retirement.
