Lots of people have their own ideas about how to earn passive income. Very few, however, earn hundreds of millions of pounds in passive income a month on average. But Warren Buffett does. The ‘Sage of Omaha’ is a seasoned investor who earns huge passive income for his company Berkshire Hathaway from owning shares in large, well-known companies.
I could follow a similar investing approach, although as I have nothing like Buffett’s vast financial resources at my disposal then my earnings will be far smaller. In the end though, I think I too could earn a lot of income.
Investing for the long term
When I say in the end, I mean far into the future. Buffett is all about long-term investing. When it comes to passive income, that approach can speak for itself.
Imagine I have £100 and put it into a dividend share yielding 6% today, such as Lloyds (LSE: LLOY). It would hopefully earn me £6 a yield in dividends.
But if I compounded (reinvested) my £6 each year, after 35 years my initial £100 investment ought to have snowballed into a shareholding earning me £46 every year in dividends.
Piling up resources
That would be a start. In fact, Buffett began his own investment career by putting a couple of hundred dollars into a single share.
He would never put all of his money into one share – and so even if I wanted to buy Lloyds for my portfolio, I would add in other shares too.
Meanwhile, if I want to build massive passive income streams, a £100 investment alone will not cut it. Buffett has spent decades growing his resources, piling up more and more money to put to work in the market.
Imagine that I did a similar thing on a more modest scale. If I invested £100 a week in a portfolio of shares and compounded my gains at 6% annually, after 35 years I would be earning over £35,700 in passive income each year.
Finding shares to buy
I do not own Lloyds – and neither does Buffett. Investing is about assessing risks, not just looking at potential rewards. As Buffett says, the first rule of investing is not to lose money – and the second rule is never to forget the first one.
While I like Lloyds’ strong brands and large customer base, I am put off by the risk of an economic downturn pushing up loan defaults and hurting profits. The dividend is never guaranteed and Lloyds cancelled it after the last economic crisis in 2008.
Buffett does own some bank shares though, along with shares in insurers and well-known consumer goods companies like Coca-Cola (itself a passive income gusher for him).
His circle of competence is different to mine and he emphasises the importance of an investor staying with what he knows.
But I find it interesting that Buffett has built enormous passive income streams not through speculation but by investing in well-known, blue-chip companies with proven business models.
I aim to do the same – I just need to find the right shares to buy!
