Warren Buffett bought his first stock in the 1940s when he was just a boy. Eight decades later he is still investing.
Now, clearly not everyone has such a natural appetite for investing as the ‘Oracle of Omaha’. Many people don’t start their stock market journey until their mid-30s, or even later.
The good news is that still leaves potentially decades of compounding in which to build a sizeable sum of money.
Indeed, if I opened a Stocks and Shares ISA today and maxed out my contribution limit each year, I could be sitting on a million-pound portfolio in just under 22 years.
That’s based on the assumption that I generate an average historical annual stock market return and reinvest my dividends. While the future average return might not mirror that of the past, it’s still an inspiring thought.
Also inspiring is the fact that Buffett’s powerfully simple investing approach can be replicated by everyday investors. It basically boils down to buying shares in great businesses at fair prices and holding them for long periods of time while collecting dividends.
Let’s consider each one of those concepts separately.
Great businesses at fair prices
In February, Buffett published his popular annual letter to Berkshire Hathaway shareholders. Under a section headed ‘The Secret Sauce‘, he recalled purchasing shares of Coca-Cola.
This position was started in 1988 following the stock market crash of the previous year. As often happens during crashes, most stocks got sold off regardless of their underlying fundamentals.
This enabled Buffett to buy a great business at a very fair price, and it took him til 1994 to finish building out his position. Over those years, Berkshire accumulated the 400m shares of Coca-Cola that it still owns today.
As Buffett explained: “The total cost was $1.3bn…The cash dividend we received from Coke in 1994 was $75m. By 2022, the dividend had increased to $704m. Growth occurred every year, just as certain as birthdays“.
Fortunately today, the UK stock market is full of great businesses trading at low valuations. One that stands out to me in particular is Legal & General.
This is an insurance and asset manager that has been in business for nearly 200 years. And its stock is trading on a P/E of just 6.5 and yielding a mouth-watering 8.6%.
Collecting dividends
This year, Berkshire is expected to receive around $5.7bn in dividends from its $370bn equity portfolio.
However, just three dividend shares are expected to generate nearly half of that amount. These are oil stocks Occidental Petroleum and Chevron, and Bank of America.
While my own portfolio is a pipsqueak in comparison, the principle is the same. I use the cash generated from my dividend stocks to invest in even more shares.
Holding stocks for long periods of time
Buffett famously said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes“.
I can’t benefit from compounding if I’m trading in and out of stocks all the time. Likewise, if I sell my shares, I’m not going to receive any cash dividends.
Buffett also said that his favourite holding period is forever. If I combine this mindset with regular investments, then 35 is still young enough to build a very nice retirement pot.
