The legendary investor Warren Buffett has a lot to teach us about how to put money to work in the stock market.
He started investing as a schoolboy with money earned from a paper round. Today, even without savings, I think it is possible to take the Buffett approach when it comes to building wealth. Here is how I would go about it.
Getting money to invest
Like Buffett, I would start investing by pulling together some money. That could be putting a little aside at the end of each week or month, perhaps into a share-dealing account or Stocks and Shares ISA.
The amount would depend on one’s own financial circumstances. But putting aside even a modest sum on a regular basis could help form the foundation of future stock market success.
Adopting a realistic investment strategy
One of the interesting things about Warren Buffett is just how mundane some of his shareholdings seem. He has made billions by investing in large, well-known, proven companies he understands well and then hanging onto the shares for decades.
That is not an accident.
Buffett knows what he is good at and sticks to it. He is not trying to get in on the next big thing before others have even heard of it. He is simply looking to own a diversified portfolio of excellent businesses in which he invests at a reasonable price, then holding onto those shares for the long term (indeed, he has said his favourite holding period for a share is “forever”).
As a private investor, I think following a similarly wall-considered approach that took risk seriously and focussed on proven businesses I understood could hopefully help me grow wealth over time.
Looking for shares that could build wealth
So, what would it mean practically for me to invest using some of the lessons I have learnt by watching Warren Buffett?
Consider Aviva (LSE: AV), as an example. The insurance share falls squarely within Buffett’s circle of competence and I also feel that I understand it well enough to consider whether or not to own it.
Insurance is an industry with a proven business model and resilient demand. Within that, Aviva has some competitive advantages, such as a large customer base, strong brands, and long experience in underwriting. Over recent years, it has streamlined its business to focus more on its core UK market.
That brings risks: if returns in the competitive UK insurance market fall, Aviva would suffer. The company has form in cutting its dividend. It cut the annual payout per share by almost a third in 2020.
But with a strong business, 7% dividend yield, and price-to-earnings ratio of 11, I see Aviva as a share investors should consider buying.
Buy and hold
Having bought a share, what does Warren Buffett then do?
Often, nothing. He sits back and earns dividends year after year in many cases. By investing in the right businesses at an attractive price, he aims to build wealth over time simply by holding those shares, not trading them frequently.
