When it comes to retiring, Warren Buffett might seem like an odd source of inspiration. After all, the billionaire investor is still working in his nineties.
However, for many people, retiring in general and especially retiring early involves making smart decisions about building enough wealth to be able to do so.
On that topic, Buffett can certainly provide lots of wisdom.
Risks are risks at any stage
A lot of people think that, closer to retirement, investment portfolios ought to become less risky. The corollary of that way of thinking suggests that, when people are further from retirement and so have longer investing timeframes, they can afford to take more risks.
There’s a logic to that, in my view. But contrast it to Buffett’s approach. The sorts of companies he has been investing in in his later decades are similar to the ones he was buying at a much younger age.
Sure, there are exceptions: Apple was more tech-facing than most of Buffett’s historical large investments. But in general, Buffett’s been buying the same sorts of firms for many years, since he was a young man.
They tend to be long-established, large, have a competitive advantage and a proven business model. He has also stuck to a limited number of business sectors for most of his investments. One lesson I draw from that is risk tolerance. If an investment is too risky, arguably that is not because the investor is at a certain age, it is because it is too risky.
When an investor figures out their personal risk tolerance and sticks to it, they are less likely to lose money by making investments they know do not really suit them, on the pretext that time is on their side.
ABC: always be compounding!
Time can be on their side though. In investment terms, time can be a mixed bag. Depending on what you do, it may either work for you or against you.
Buffett is a big believer in compounding, which is basically reinvesting dividends (or capital gains) to buy more shares. Combined with a long-term approach to investing, that has allowed him to reap serious financial rewards from some of his investments over the course of decades.
The Midas touch in action
An example is his investment in Coca-Cola (NYSE:KO). Buffett started buying shares in the company for his investment vehicle Berkshire Hathaway in the 1980s. Indeed, it is over 30 years since he bought the last one.
He has not bought for decades – but he did not sell either. Instead, he just let the dividends roll in year after year.
And roll in they have. Coca-Cola has grown its dividend per share annually since before Buffett owned it. Last year alone, Berkshire’s original $1.3bn investment in Coca-Cola generated well over $700m of dividends.
That was not always guaranteed to happen (nor is it now, at Coca-Cola or any company). Changing diet habits remain a risk to Coca-Cola’s sales.
But it also has the hallmarks of a classic Buffett pick. Its famous brand, global bottling networks and unique recipe are all strong competitive advantages. They give it pricing power, allowing it to make the profits that fund those dividends.
