No savings? I’m using the Warren Buffett method as I aim to get rich

Christopher Ruane explains how he’d aim to build a stock market portfolio by learning lessons from a master investor — Warren Buffett.

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Warren Buffett at a Berkshire Hathaway AGM

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Warren Buffett is a billionaire. But as a schoolboy, he carefully counted his pennies. Saving money from a paper round enabled him to make his first move in the stock market.

Few investors begin as young as Buffett. But even starting at a later age with only pennies in the piggy bank, I think applying his method could help build wealth.

Here is how I would go about it if I was starting from zero.

Find a source of capital

It does not necessarily take much money to buy shares – but it takes some. Having no savings is not a bar in this regard. It just means one needs to find some other source of capital to invest.

To do that, I would start putting aside some money to invest on a regular basis. How much would depend on my own financial circumstances… everybody is different.

I would put the money into a share-dealing account, or Stocks and Shares ISA, ready to invest as soon as I saw an opportunity.

Simple, understandable and, hopefully, untouchable

When Buffett invests, it is often in household names like Apple and Coca-Cola.

He is not trying to ferret out unusual opportunities in obscure companies before anyone else hears about them. He keeps things simple, investing in large, established companies with proven business models.

Another principle is investing only in what he understands, something he terms his circle of competence. If I put money into an industry or company I do not understand, it is not investing – merely speculation.

Buffett also emphasises the concept of a good business, being one that has what he terms a ‘moat’.

Like medieval castles, this is something that keeps rivals at bay – and hopefully makes the company’s business almost untouchable, at least for now. Apple’s brand, patented technology and user ecosystem are key examples.

Invest for the long term

With an outlook that spans decades, Buffett is the archetype of a long-term investor.

Why does that approach make sense? Remember, Buffett is buying into what he thinks are great businesses with strong competitive advantages.

If his analysis is right, by hanging onto his shares for a long time, he ought to be able to benefit from the strength of those businesses.

He sometimes sells losers, as with his investment in Tesco around a decade ago that ended up losing hundreds of millions of pounds.

But, as investors say, he often ‘lets his winners run’. In other words, he hangs onto them for the long term.

The power of compounding

Buffett compares a share portfolio to a snowball. As it goes downhill, it picks up more snow (and speed), which in turn attracts even more. In time, size begets size.

By reinvesting his dividends – something called compounding – Buffett has grown his wealth faster than if he had not done so. I can apply the same simple, but powerful, principle to my own investing.  

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple and Tesco Plc. 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.

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