But to achieve financial freedom today, investors only need to build a fraction of this treasure hoard. And by following in Buffett’s footsteps, even a modest £500 monthly investment is all that’s needed to build a seven-figure net worth. Here’s how.

Buffett’s winning investment formula

Rather than chasing the latest trends or pursuing the biggest growth opportunities, Buffett chose a simpler path. He focused exclusively on finding the highest quality companies trading at a discount to their intrinsic value in industries he understood perfectly.

Even in boring sectors, tremendous buying opportunities can emerge for long-term investors who stay focused and patient while everyone else chases the hype in an attempt to get rich quick.

As Buffett puts it: “Time is the friend of the wonderful company, the enemy of the mediocre”. By investing in the boring businesses that possess a moat of durable competitive advantages that allow them to reinvest cash flows at high rates of return, the compounding process can be drastically accelerated.

This is how Buffett achieved a 19.8% average annualised return over the long run. By comparison, the S&P 500 has generated a long-term average total return of 10.6% a year – almost half.

In terms of money, investing £500 a month for 30 years at Buffett’s rate of return unlocks £10.9m of generational wealth versus the £1.3m achieved by the US stock market.

Another victorious Buffett stock pick

The billionaire investor has made plenty of massively successful investments over the course of his career, including in Coca-Cola and American Express. But another lesser-known victory is his investment in Moody’s (NYSE:MCO).

The company is a perfect example of Buffett’s moat-driven long-term strategy in action. The financial services company operates as a near-invisible duopoly, generating enormous cash flows from issuing credit ratings every time a government, company, or bank wants to borrow money by issuing bonds.

In other words, the company is a toll booth to the public debt markets that’s virtually unavoidable. Buffett recognised this unassailable advantage decades ago. And since he first inherited shares in October 2000 following a spin-off, his decision not to sell has delivered close to a 4,200% total return.

With that in mind, it’s no wonder his successor at Berkshire Hathaway, Greg Abel, has described Moody’s as a “forever” holding.

Still worth buying?

Today, Moody’s continues to rake in enormous credit rating fees. But the company has also diversified its revenue stream through data & risk analytics software solutions to generate even more predictable and recurring income.

Buffett’s thesis remains intact. And with additional expansion within the private credit market emerging, Moody’s days as a boring quality compounder look far from over.

Of course, that doesn’t make it risk-free. The emergence of powerful and cheap AI tools could disrupt its newer analytics arm. And its core ratings business is also subject to enormous cyclicality since demand for debt can vary significantly during periods of economic or geopolitical uncertainty.

Nevertheless, for investors seeking a Buffett-style quality compounder, Moody’s shares could definitely be worth a closer look.

The post Want financial freedom? Here’s Warren Buffett’s wealth-building formula appeared first on The Motley Fool UK.

But what is right for Buffett might not suit me. Every investor is unique. Still, I think I can learn some valuable investing lessons from the ‘Sage of Omaha’.

Here are five things Buffett looks for when buying shares. I would do the same!

1. Background understanding

Buffett tries to stick to what he calls his “circle of competence” when investing – basically areas he understands.

Take his stake in Moody’s (NYSE: MCO) as an example. Moody’s spends its time looking at businesses and their finances, to assess their creditworthiness.

That is right in Buffett’s zone of expertise. He also spends hours each day combing over company accounts to assess their business prospects.

By sticking to business areas he understands, Buffett is more likely to be able to assess whether a share’s valuation is attractive.

2. Looking for a moat

When Buffett buys into a business, he likes it to have a strong competitive advantage that can help it make profits.

He calls this a moat, just like ones used to help protect medieval castles from attackers.

Moody’s is a great example, in my view. Credit ratings are a necessary part of many contracts, so demand for them exists even when the economy is weak. Only a few large providers have name recognition — and Moody’s is one of them.

Not only do some contracts explicitly require a rating from a named agency, such as Moody’s, but the complexity of providing such ratings is a barrier to entry for new companies to the corporate credit rating market.

3. Healthy balance sheet

Such a business model requires few assets and the key asset is often a talented workforce.

Buffett has invested in asset-heavy industries like railways and energy networks, as well as asset-light ones like credit rating agencies and advertising providers. In both cases he looks for a healthy balance sheet.

In other words, how productively can a business utilise its assets? If the assets suck up money rather than helping produce it, they are not assets but liabilities.

4. Attractive valuation

Buffett started buying into Moody’s back in 2000. Since January 2000, its shares have grown over 3,500% in value.

While the current dividend yield of 0.9% may not look strong, if I had bought shares in 2000 like Buffett, my investment would now be yielding over 30% annually. Wow!

Not all of Buffett’s investments work out as well (Tesco did not). But many do work well because he pays close attention to valuation.

He does not just try to buy into great businesses. He tries to buy when such shares are attractively valued.

5. Buy for the long term

As I said, Buffett began buying Moody’s shares 24 years ago. He still has a large stake over two decades later.

As a long-term investor, he tries to buy into great business at attractive prices and then hang onto his stake, unless something happens that negatively affects the investment case. That has helped him build serious wealth.

I apply the same approach. That is why I am looking for shares to buy now that I could hopefully hold for decades.

The post 5 things Warren Buffett looks for when buying shares appeared first on The Motley Fool UK.

Whilst Buffett doesn’t talk about Moody’s often, it’s easy to see what attracts him to the stock. The ratings agency provides an indispensable service, is difficult to disrupt, and generates big returns on its fixed assets.

I think that Experian (LSE:EXPN) has a lot of the features that make Moody’s a desirable investment to Buffett. As a result, I’m looking at buying shares for my portfolio.

Indispensability

Experian provides data and analytics that help lenders evaluate potential borrowers. Its data allows customers – the majority of which are banks – to assess the risk involved with making loans.

Buffett loves Moody’s because it provides a service that businesses cannot do without. They need their credit rating from Moody’s in order to be able to raise funds by issuing bonds.

Likewise, Experian’s data and analytics are indispensable to the lending process. Whilst Equifax and TransUnion also provide credit evaluation services, banks typically use data from all three to get the best possible insights.

Difficult to disrupt

Experian’s business is also extremely difficult to disrupt. It has a vast database of information that would be very hard for any new competitor to emulate. 

Emulating Experian’s database would involve gathering information from thousands of sources. Experian has data on 1.2bn individuals and 145m businesses. 

This means that a new competitor setting up would have a huge task to build a product comparable to Experian’s. I think that the protection from disruption here is similar to what Buffett sees in Moody’s.

Big returns

Ultimately, a powerful business is only any good if it results in strong cash generation. Both Moody’s and Experian are able to put their competitive positions to good effect in producing significant returns.

According to its most recent set of accounts, Moody’s has $785m in fixed assets. Using these, it generates $2.6bn in operating income, which I view as very impressive.

I think Experian is equally strong here, though. With $415m in fixed assets, the company produces just under $1.4bn in operating income.

Risk

Any investment brings risk and Experian is no different. At the moment, economic conditions are tightening and this may well impact on demand for Experian’s services as lending slows down.

In my view, though, the risk here is offset by the rate at which Experian is growing outside its core markets. As it expands into emerging markets, its available market grows and I think that this should offset any slowdown in loan demand in the USA.

Conclusion

It’s easy enough to see why Buffett owns such a large stake in Moody’s. The company has a dominant position in a market that is likely to remain durable and the business produces strong cash returns.

I think that Experian has all of the properties that make Moody’s attractive to Buffett. As a result, I’m looking at buying shares for my portfolio today.

The post I’m buying this FTSE 100 stock to invest like Warren Buffett appeared first on The Motley Fool UK.