If investors have a few thousands pounds to invest, then following Warren Buffett’s methods could be the best way to use it.
Warren Buffett has won hearts all across the globe as an accessible and sensible billionaire. He doesn’t splash his gargantuan wealth on private jets or Caribbean islands. Through Berkshire Hathaway he has given away more than $37bn to charity since 2006. It’s a noble cause which I’m sure most of us would love to emulate.
And a brilliant fact I learned recently is that 99% of his £65bn net worth was amassed after the age of 50! That shows you the impressive power of compounding growth over many years.
Warren Buffett 101
In his early years Warren Buffett learned an important lesson under the tutelage of the great master Benjamin Graham.
Don’t lose money. It would become his number one rule. The second rule, by the way? Never forget the first rule.
But Berkshire Hathaway lost a record $50bn in the great stock market crash of March 2020. So how can he tell us not to lose money?
What he’s really referring to here is the kind of outlook investors should have if they want to make money long-term. Don’t take big, stupid risks. Don’t gamble. Avoid complex financial instruments that are difficult to understand.
Investors take on massive and totally unnecessary risk, for example, with leveraged products like contracts for difference (CFDs). Thankfully the UK’s market regulator, the FCA, has now banned the sale of some of the most aggressively marketed products promising quick riches, like cryptocurrency derivatives.
Buy low, buy well
For his part Warren Buffett concentrates on buying good companies at knock-down prices. He then sticks around for the long term and collects the dividends.
It’s a strategy that’s been harder to pull off this year than ever before. UK dividend and income investors have had a rotten 2020.
The coronavirus pandemic and associated lockdowns saw 45% of the entire FTSE 100 index either stop or slash their payouts. But some green shoots of recovery are returning. Tesco, for example, recently increased its dividend by 20%.
Compound wealth now
Compounding growth the Warren Buffett way is a lot easier with dividend-paying stocks, too.
Let’s take £3,000 invested in a FTSE 100 or FTSE 250 stock paying 7% dividends. Investors won’t receive the same amount every year if they stay invested. Each year the payout actually grows larger! And each year the dividend grows in tandem too. Compound growth, see?
Reinvesting dividends tax free in a Stocks and Shares ISA is an efficient way to do this long term.
But thinking long term doesn’t just extend to compounding wealth. It’s also a good general lesson to learn, in my book. If I’ve found an investment that’s given me great returns in the past, I tend to stick with it. Just like Warren Buffett.
I know I’ve done the hard yards of research. I’ve looked at the profits. I’ve looked at the management team. I know the fundamentals. And I’ve bought in at an attractive valuation when the market has mispriced a stock for some reason or other. This happens far more often than even I believed when I started investing.
TomRodgers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). 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.