Every month, I invest in my SIPP (Self-Invested Personal Pension). This is a fantastic investment vehicle for two main reasons. First, my investments grow free from capital gains and income tax. Second, every time I put money in, I receive government tax relief a few weeks later. I use this to buy further shares.
Starting in April 2028, I’ll need to be 57 before I can take any money out of my SIPP. This is another benefit, in my opinion, because it encourages a long-term investing mentality. And this allows me to take advantage of something that billionaire investor Warren Buffett has called his “secret sauce.”
In fact, if I were starting my investing journey with no savings in a SIPP, I’d remember this key Buffett lesson.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Flowers and weeds
In his latest annual letter to Berkshire Hathaway shareholders, Buffett revealed his secret sauce when it comes to investing.
He wrote: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders“.
What do these pithy words mean exactly?
Well, the weeds are the duds in a portfolio. The ones that have underperformed, for whatever reason. Every investor ends up accumulating weeds over the years, usually a fair few of them. I know I have.
In contrast, flowers are stocks that end up becoming incredible long-term winners.
Coca-Cola and Tesco
As mentioned, no investor is immune to losing money, even the Oracle of Omaha.
In 2014, for example, he admitted that he made a “huge mistake” by not selling his investment in Tesco sooner. He lost around $444m by the time he pulled this giant weed from Berkshire’s portfolio.
However, as Buffett pointed out, the good news is that weeds become insignificant over time.
An example here would be Coca-Cola, one of Berkshire’s biggest winners. In 1994, Berkshire finished a seven-year buying spree of 400m Coke shares that it still holds today. The total cost was $1.3bn and the cash dividend received from the stock in 1994 was $75m.
By 2022, the dividend had increased to $704m!
That means these Coca-Cola shares now pay — every year — nearly double what was lost just once on the Tesco investment. Talk about the weeds withering away in significance as the flowers bloom!
The Foolish approach
Of course, at first, it won’t be obvious which is which. It will take a few years for that to become apparent.
But I can testify to the power of this buy-and-hold investing strategy in my own portfolio.
For instance, The Trade Desk ranks as one of my single biggest SIPP holdings today. This is an advertising technology company. It provides a self-service platform that enables advertisers and agencies to purchase digital advertising campaigns across various channels.
As global advertising has increasingly turned data-driven, the company has benefitted massively. And this has driven the share price up sharply over the last few years.
But when I first bought shares of The Trade Desk, the size of the holding was roughly the same as the other stocks I owned.
As it gained in value, however, it morphed into a very large position and so far bloomed brightly in my portfolio.
In essence then, Buffett’s secret sauce strategy is very simple. It’s about buying shares to hold for years and letting the winners run high. Really high, in some cases.
It is these stocks, these flowers, that can really help to build wealth in a SIPP over time. And it is my job as an investor to try and find them. Then to hold onto them, tenaciously.
