Warren Buffett is said to have started investing when he was 11. Unfortunately, it’s too late for most of us to consider becoming school-age investors. The good news is that the billionaire’s methods still work for older investors.
Indeed, Buffett is now 92 and still building wealth for shareholders of his firm Berkshire Hathaway.
For investors with no savings at 45, I think the method I’m going to explain today could deliver great results.
Buffett’s method: keep it simple
Mr Buffett has often explained his investment method. He aims to buy companies with attractive long-term prospects at a reasonable price. If things go to plan, he then holds them for a very long time.
I reckon the first thing to understand is Buffett’s view of the stock market:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
Warren Buffett
A lot of investors might be frightened at the idea of the stock market closing. But Buffett views his investments as a business owner would. He doesn’t want to sell quickly. Instead, his aim is to earn much bigger profits from their long-term growth.
The right type of business
He doesn’t invest in all types of company. Instead, he focuses on buying companies in industries he understands, with “favorable long-term economic characteristics”.
For me, there are two takeaways from this approach.
- One of the world’s best investors knows that there are some businesses he can’t understand or value accurately. I think that’s a useful reminder for the rest of us.
- Investing in businesses with an economic moat — a lasting competitive advantage — is a big part of his success.
A good example of this approach is Coca-Cola. The soft drinks firm is one of Mr Buffett’s largest and oldest holdings.
Coke‘s global brand appeal and pricing power haven’t changed much since Buffett started buying the shares in 1988.
It’s been an amazing investment. Coca-Cola’s dividend has risen each year for more than 30 years. As a result, Buffett’s annual dividend income from this stock is now equivalent to more than half his original investment.
In other words, he doubles his Coca-Cola investment every two years from dividend income alone.
Which UK shares might Buffett buy?
A lot of Mr Buffett’s big investments are in financial stocks, consumer goods, technology and energy.
In the UK market, I think that suitable companies might include Unilever (Buffett tried to buy it in 2017), Diageo, BP, and perhaps Lloyds Bank.
Of course, there are no guarantees that these companies won’t suffer problems in the future. All investments carry some risk.
However, if the market closed for five years tomorrow, I’d be happy to be left owning these stocks.
Finally, I’d like to talk about money. How much could an investor save by retirement age, starting at 45?
My sums suggest that investing £250 per month for 20 years could generate a fund of £147,000. That’s based on an average annual return of 8%, which is similar to the long-term average for the UK market.
It’s not guaranteed, of course. But I think it’s a good reason to start investing today.
