Warren Buffett is one of the world’s greatest investors, so it’s only natural I’d want to learn from a true master of wealth-building. That’s especially so as the 93-year-old legend has been picking stocks for nearly eight decades!
Now, I’m not intending to work into my nineties. So I’m adopting parts of his investing philosophy to build up a resilient passive income stream for retirement.
And I could use these ideas even if I was 30 years old and (like most people that age) with zero passive income so far.
The right temperament
Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
Warren Buffett
First, I think it’s essential to start developing a long-term investing mindset. It’s not about getting rich overnight. So there’s no point in being reckless by chasing meme stocks or the latest hot biotech with no revenue.
That will likely end in tears and destroy my wealth.
What I think Buffett is saying in the above quote is that the right mindset and emotional discipline are more important than IQ when investing.
Keeping it simple
Next, Buffett doesn’t stray outside of what he calls his “circle of competence“. And this helps him to avoid investing in things he doesn’t understand.
To give an example, I’m not a computer scientist and haven’t studied quantum mechanics. Therefore, I have only the most rudimentary knowledge of quantum computing, a potentially world-changing technology.
So would I invest in quantum computing start-up IonQ? Absolutely not. I couldn’t say whether its technology gives it any sort of competitive advantage.
In Buffett’s terminology, this is way outside my circle of competence.
But I do know IonQ has little revenue and is loss-making, yet is valued at $2.5bn! So it’s a pass from me.
This is crucial for a dividend-paying firm too. I need to understand exactly how it generates cash flows from which it will pay me passive income. If I don’t understand, I won’t know whether it’s reliable.
Keeping things simple is something Buffett advocates.
Buying fallen shares to build income
Let’s imagine a share has a 5% dividend yield before a stock market crash. If the share price of that company falls 20% during the sell-off, then the dividend yield would become 6%.
If I understand the business and intend to hold the shares for years, then I could see this as a great buying opportunity to lock in that higher yield.
Within a few years, assuming the business continued to increase its payouts, I could reap a double-digit annual yield on my original cost basis. And that’s just from dividends, without the potential for share price gains once the market starts to recover.
Now, the UK stock market hasn’t crashed this year, but it’s certainly been in the doldrums. And one stock I’ve been eyeing up for passive income is LondonMetric Property, a British property firm now yielding 5.9% after a 12.5% pullback in its share price since April.
LondonMetric’s £1bn of loan obligations is a concern in a higher-rate environment, but its consistently high occupancy rate (currently 99%) makes the cash flows look ultra-reliable to me.
