Income and wealth are two very different concepts. I can have a high level of income, but zero wealth. Being wealthy is more associated with owning assets (such as stocks) that can provide me with long-term benefits.
Generational wealth goes one step further and involves passing on wealth to my children. It all sounds grand, but clearly requires effort on my part!
Here’s the technique I’m copying from billionaire investor Warren Buffett to try and help me to achieve this.
It’s all about value stocks
A clue to the technique can be observed from the longevity of Buffett being a successful investor. He hasn’t generated high profits in a short period and then gone quiet. Rather, he’s known for achieving stable and steady gains over decades.
He bases a lot of this on this strategy to buy value stocks. In essence, these are companies that have a share price below their long-term fair value. I can try and ascertain the fair value by comparing the share price to historic levels or looking at the value of similar companies in the same sector.
If I’m able to buy a stock below where it should be trading, I stand to profit if I’m correct. Granted, a risk here is that it can take years before a share does rally, especially if it is tied to a recession or broader stock market crash. Yet Buffett has shown time and again that with patience and the right time horizon, profits can be made from this technique.
A case in point
It’s one thing to note the theory, quite another to put it into practice. One good example was flagged up in the recent stock filing disclosures from Buffett’s investment company Berkshire Hathaway.
In recent months, the business has invested $4.1bn in Taiwan Semiconductor. The stock is down 32% over the past year, struggling with broader sluggish economic growth in Asia and supply chain issues. Fundamentally, it has a good business model that is profitable but has simply run into some short-term headwinds.
Given the purchase (and the amount invested), it shows to me that Buffett feels the stock is undervalued. Whether this is true or not remains to be seen. But it shows a good example in how the great man puts his theory into practice.
Following Buffett’s well-trodden path
It’s going to take time for me to build generational wealth in the coming decades, so it makes sense to get started straight away! As well as looking at the value stocks Buffett is buying, I’m also filtering UK stocks to find picks.
Although it can be quite subjective, I’m trying to use metrics such as the price-to-earnings ratio. The lower the share price is relative to the latest earnings per share, the better the value should be. Clearly, if the ratio is very low then it could show that investors are concerned about the future for the business. But if used alongside my other research, I can find smart picks.
I realise that returns aren’t guaranteed, of course. But over the years to come, I feel that building a portfolio of value stocks should grow my assets to form the bulk of my wealth.
