Billionaire investor Warren Buffett’s long-term performance is remarkable. He’s achieved a compounded annual gain running just above 20% since 1964.
Imagine having a bank account that pays 20% interest every year. And think about how fast the money would grow over 5, 10, 20 years and more. That’s the equivalent of what Buffett has achieved with his holding company Berkshire Hathaway.
A consistent strategy
His strategy has been consistent for decades. And he’s been free passing on his insights to others.
My plan is to aim for a million starting in 2023 by following Buffett’s advice. Although there’s no guarantee I’ll succeed. And even his advice may not protect me from all the risks that come with stocks and shares.
Nevertheless, I reckon the stock market is offering investors a decent opportunity right now. We’ve just endured a bear market for many stocks and that’s driven valuations and share prices down.
But lots of businesses have been reporting robust trading and upbeat outlook statements. The conditions seem right to fulfil one of the key requirements Buffett has used to outperform the market.
He’s on record as saying: “A too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favourable business developments.”
And that emphasises his focus on valuation. Buffett often mentions that he looks for a margin of safety when buying stocks. And that means he aims to buy a stock when it’s valuing a business below what it’s actually worth.
A focus on quality
However, valuation isn’t the only consideration. And we rarely see Buffett piling into stocks just because they look cheap. In many cases, low valuations are low for a reason and it’s often because the underlying business is of poor quality.
He once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
So the quality of an enterprise is important to Buffett and it needs to be high. But there’s more to finding a high-quality business than just looking at the numbers. One of the most important things Buffett seeks is a long runway of growth in earnings ahead. I read that in a book by Mary Buffett and David Clark called The Warren Buffett Stock Portfolio.
The requirement for growth is all about peering into the future. And Buffett’s approach strikes me as being as much about art as it is science. But when he’s found a quality business at a reasonable valuation he tends to hold on tight.
A well-known quotation of his is: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
That one underlines his long-term perspective for investing. And, although nothing is certain, I’m hoping these insights will help me grow my own stock portfolio to the magic million.
