Forget day trading! I’d rather follow Warren Buffett to build stock market wealth

This Fool reckons following billionaire Warren Buffett’s example of making money in the stock market is far superior to dabbling in day trading.

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Warren Buffett at a Berkshire Hathaway AGM

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Warren Buffett is arguably the world’s most famous exponent of long-term investing. After all, he still holds shares he bought over 30 years ago, notably Coca-Cola.

In 2023, his firm Berkshire Hathaway received $736m in Coke dividends, and that is set to rise to about $776m this year. Put those figures together and that’s more than the original cost of the shares ($1.3bn).

On top of this, there has been significant share price appreciation. No wonder they call him the Oracle of Omaha!

Last year, Buffett mentioned these dividends: “Growth occurred every year, just as certain as birthdays. All Charlie [Munger] and I were required to do was cash Coke’s quarterly dividend cheques. We expect that those cheques are highly likely to grow.”

He was right. In 2024, Coca-Cola raised its annual dividend for the 62nd straight year.

Too good to be true?

In complete contrast to this, there’s day trading. This is where individuals buy and sell shares over a single day, with the intention of making a profit from small price fluctuations.

There are a couple of problems with this, in my opinion. Firstly, it seems like a hell of a lot of work. Most days, I’d have to monitor news and signals, charts and patterns.

Alternatively, AI-powered software could automate trades for me. In theory, I just set things up and go for a swim or sauna and it makes me money.

In my experience though, when something sounds too good to be true, it normally is. Plus, what if the software or trading system starts losing me money? Do I tweak it, buy new software, fall back on my gut instinct? That sounds like a stressful situation.

More importantly, numerous studies show that as many as 90% of day traders lose money, with most understandably quitting within two years.

A top UK stock

Given this, I’ll stick to Warren Buffett’s philosophy of finding high-quality shares to buy and hold.

One FTSE 100 stock I’ve got my eye on is Experian (LSE: EXPN). As one of the world’s largest data analytics and credit reporting firms, it possesses a mind-blowing amount of consumer and business data.

These vast databases are nigh on impossible to replicate. And they’re crucial for decision-making in various sectors, including banking, retail, healthcare, telecommunications, and insurance.

What I like about this is that the company’s revenue comes from a mix of subscription-based and one-off transactions, from a wide range of sources. This diversity has enabled the firm to keep growing despite the recent period of constrained lending.

In its last financial year, which ended in March, the firm’s revenue grew 8% year on year to $7bn. And it reported a record $1.9bn in operating cash flow, representing 6% growth.

While this may not sound too exciting, the company expects its medium-term organic revenue growth to be in the high single digits. And that should add up nicely over time.

One potential risk is that the stock is richly valued at around 30 times forward earnings. Experian will need to keep growing long term to justify that.

But I think it will, as demand for credit data and analytics grows particularly in emerging markets like Latin America, where its business is growing rapidly.

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.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian 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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