If I wanted to get rich by investing, Warren Buffett might be the most important man to listen to. His strategy is simple but brilliantly effective for building wealth. I’m about to explain how he does it, but first, let’s remind ourselves why he’s worth paying attention to.
A single share in his company, Berkshire Hathaway, cost $1,080 in 1983. Now, each share is worth $550,000. They rose so much that the firm had to split into Class A and cheaper Class B shares.
On a yearly basis, his investing strategy has returned around 20%. That’s a killer return. It looks even bigger compared to the FTSE 100 average of 7.2% or the S&P 500 average of 10.2%. I’m not even sure that does justice to it either.
For example, if I could earn 20% a year with Buffett’s advice, I’d turn a £20k stake into £123k after a decade. Over 20 years, the £20k would turn into £766k. It grows at an almost unbelievable rate.
And the best thing about his advice is that it’s so simple.
The companies he built his wealth with include Coca-Cola, Apple, American Express, and Costco. These aren’t hidden gems he had to unearth. They’re big names with products that are easy to understand.
He finds these companies by looking for an ‘economic moat’. He coined that term, by the way. It means a competitive advantage that can’t be taken away. Coca-Cola is a good example. Its recipe is a closely guarded secret and keeps its customers coming back for more.
What to invest in
So if I wanted to invest like this, how would I go about it? Well, the easiest way is to invest in Berkshire Hathaway. While its Class A shares are $550k, it also has Class B shares for $362. I buy those and it’s like I’m pooling my money with Buffett and his investing style.
That said, he’s 93 now. While he’s still the CEO and public face of the company, he might not be for much longer. And who can say how well the firm will do once he takes a backseat?
Instead, I could invest in companies myself. One I already own shares in is Apple. It makes up 51% of the Berkshire Hathaway portfolio so Buffett must like it. It has a clear moat too. The Apple branding is so desirable that some people call it a ‘luxury goods’ company rather than a tech one.
Another choice is Diageo. The FTSE 100 drinks maker sells popular products like Guinness, Tanqueray and Johnnie Walker. That’s a great moat right there. It’s also the only British-based company in the Berkshire Hathaway portfolio.
However I do this, I must bear the risks in mind. When I invest in single companies, I have the chance for higher than average returns but also lower than average returns. A bad pick could end up losing me money.
Great advice
And while it’s fun to fantasise about how rich I’d get from 20% returns, it’s really the best-case scenario. A goal of 10%-12% returns is more grounded.
Still, if I’m looking to build wealth or even get rich through stocks, then Buffett’s approach is fantastic to learn from. Look for quality companies with economic moats. It’s great advice. I’ll continue to follow it.
