How investors could aim for a £20k second income using the Warren Buffett method

Warren Buffett is perhaps the most successful stocks and shares investor ever. Who better to turn to to learn how to do it?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Fans of Warren Buffett taking his photo

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I look for ways to earn an extra income, I take inspiration from Warren Buffett. He’s been the leading light at Berkshire Hathaway since 1965, and he’s made a lot of money for a lot of people.

My other favourites include Ben Graham, Sir John Templeton, Peter Lynch, and more. They share one thing in common. And that’s buying top quality stocks at attractive prices, to hold for the long term.

Ben Graham, by the way, wrote The Intelligent Investor, which Buffett described as “the best book about investing ever written“. It’s a great read.

The alternatives

There are always other ways, mind. I might follow all those great investors who mastered the secrets of making millions from penny stocks.

Or I could learn from the experts at short-term stock market timing, and those who know how to find the next get-rich-quick multi-bagger.

I’m talking about people like… now… who is it?

Nope, can’t think of any. Long-term buy-and-hold for me it is, then.


No look at Warren Buffett would be complete without a quote. So, erm, here’s one from Peter Lynch:

Never invest in any idea you can’t illustrate with a crayon.

Peter Lynch

To explain something simply is perhaps the best way to actually understand it. With many stocks I look at, I can’t easily explain where future profits will come from.

But, say, house builders? They buy bricks, stick them on top of each other, and sell the resulting house for more than it cost to build. There, my crayon doesn’t even need sharpening.

Track record

Buffett has always bought companies with straightforward business models, which he can easily understand and explain.

He talks about them in his annual letters to shareholders. And those are another great source of wisdom that I’d recommend to any investor.

So what’s Warren Buffett’s net result?

Well, since that fateful day in 1965 when he became the boss, he’s achieved an average annual return of 20%. That’s massive.

A £20k income?

Just £100 invested back in 1965, left untouched and earning 20% per year, would have grown to £3.9m today!

Now, I don’t have 58 years left, and I don’t expect to make 20% per year. But in the past decade, Stocks and Shares ISAs have returned 9.6% per year on average. They do lose money some years, mind.

There are more than 4,000 ISA millionaires in the UK. And, judging by the top quality FTSE 100 stocks they buy — like Shell and GSK, which feature in a lot of millionaire portfolios — they have a lot in common with Buffett, thanks to their easy-to-understand business models.

They max out their annual allowance, which we can’t all afford to do. But what might a reasonable expectation be?

Compund growth

How about someone who can invest £10k per year? And manage a more modest 5% return?

It could take only 23 years to reach a pot big enough to generate £20k per year. They could have a sum of £425,000, and still only need 5% per year from it.

Investing in shares carries risk. But I reckon buying top FTSE 100 stocks and holding them for decades is the best way to minimise it.

And, oh go on then, here’s a Buffett quote to end on:

You only have to do a very few things right in your life so long as you don’t do too many things wrong.

Warren Buffett

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended GSK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »