Billionaire investor Warren Buffett has made impressive returns through his investing career. And he’s done much of it by buying shares in good businesses at attractive prices and holding on for the long term.
His focus has been on compounding his gains. And he makes a feature of his record of compounded returns in his annual letters to the shareholders of Berkshire Hathaway.
Mind-boggling returns
The American company serves as his investment vehicle. And with it, he holds businesses outright alongside the stocks of publicly-listed enterprises.
He makes his letters available to all. And the most recent one for 2021 shows his compounded annual gain is running at around 20.1%. And that’s remarkable because it includes the gains and losses for every year stretching back to the mid-1960s.
Buffett likes to compare his investment performance to the compounded annual gain of America’s S&P 500 index. And, with dividends included, the index has produced 10.5% over the same multi-decade period.
Nevertheless, Buffett’s 20.1% figure may not sound that impressive. After all, some shares multi-bag or shoot up by 50% in just a week. But it’s the consistency that counts. Through bull and bear markets, Buffett has come out on top. And that compounded annual gain figure gave him an overall return of a mind-boggling 3,641,613% between 1964 and 2021.
My own investment plan for dividend income is modest by comparison. I aim to generate £750 a month. But to do so, I’m working hard on the building stage of my stocks and shares portfolio. And a big part of that is to reinvest dividends along the way to help keep the process of compounding working in my favour.
Inactivity drives gains
My assumption is that a portfolio of shares will eventually produce a dividend yield of around 4%. I think that’s a modest goal because stocks often yield as much as that. Some examples now include British American Tobacco, National Grid, Tesco and IG Group.
So, using the 4% yield figure, my sums show me I’d need £225,000 invested to generate an annual dividend income of £9,000, or £750 a month. So that’s the target.
And most investors have the potential to invest their way to that kind of capital sum from a standing start. It’s within reach of anyone earning an average salary as long as they develop a regular investing habit. And my solution is to invest every month as soon as my earnings arrive.
However, stocks and shares do come with risks as well as positive potential. And a decent investment outcome is never guaranteed. It’s even possible to lose money by picking the ‘wrong’ shares.
Nevertheless, the Buffett method is a decent strategy. And the heavy lifting happens within the investee businesses. In other words, he’s not earning his compounded gains by diving in and out of stocks. Instead, the real compounding takes place when a business he’s holding increases its earnings a little each year.
Inactivity is key to the process. Buffett does the research first. Then he buys at sensible prices. And after that, he waits while checking the progress of each businesses from time to time. And that’s the Buffett method I’m following.
