When times are troublesome, some investors like to retreat to what they perceive as safe havens, like gold.
But billionaire Warren Buffett is not one of them. He says the precious metal “has no utility”.
What he means by this is that the precious metal is dug out of a hole in the ground (which costs money) and then stored in a secure hole in the ground – which costs money. It is not a productive asset.
That does not mean people cannot make money by buying gold when it is cheap and selling when the price goes up.
But Buffett typically likes to invest in productive assets that can reward him while he owns them. That could be in the form of dividends, or an increase in business valuation.
By doing the same thing, I reckon I could possibly retire early. Here’s how.
Buying great businesses… then doing nothing
Buffett is not a trader but an investor. Rather than trying to buy and sell again quickly to turn a profit, he aims to purchase well-priced stakes in what he sees as great businesses. Then he holds them for years or decades.
One benefit of doing so can be the financial rewards along the way, such as dividends.
Compounding dividends to build wealth
By ploughing these back into his business, Buffett has been able to grow his company Berkshire Hathaway faster than would otherwise be the case.
As a private investor, I can do the same thing by compounding the dividends I earn.
Take my shareholding in Legal & General as an example. At the moment, its dividend yield is around 9%. If I compound a 9% dividend annually, I would hopefully double my money within nine years and triple it within just 13 years.
Growing the worth of my Stocks and Shares ISA like that could help me retire early.
Learning from an investing master
My example presumes flat share prices and dividends. In reality, they could move down – or up.
Buffett has invested in shares like Coca-Cola and American Express that have rewarded him with large increases both in share price and dividends over the decades.
His focus on buying into quality firms at attractive prices has helped him produce strong investment results.
But, even for Buffett, some shares disappoint. For now, my Legal & General shares yield 9%. But what if a financial crisis leads to an uncertain business outlook and dividend cut, as it did in 2008?
That is why, like Buffett, I diversify across a range of shares in my portfolio.
I still aim to buy into great, productive businesses at attractive prices. But by spreading my funds, hopefully a particular company disappointing me would not hurt my overall investment returns too badly.
