Warren Buffett is among the most famous investors worldwide and is known his value investing strategy. The so-called ‘Oracle of Omaha’ has built a $700bn company in Berkshire Hathaway and a personal fortune worth in excess of $100bn.
But what many people don’t know is that he built 99% of his wealth after the age of 50. And this should give all of us who don’t have much in the way of savings some hope. So starting from nothing, how can the rest of us adapt Buffett’s methods to build wealth? Let’s explore.
Compounding
Let’s start with the basics. Assuming we have no capital to kick things off, we need to create a portfolio by contributing regularly. This isn’t a Buffett rule. It’s just the 101 of starting a portfolio from nothing.
And we can do this as part of a compound returns strategy. This is the process of investing in dividend stocks and reinvesting the dividends we receive year on year. After two years we start to earn interest on our interest.
For example, if we start with nothing, but contribute £500 a month, and achieve 8% annualised returns, while reinvesting, after 10 years we’d have £91k, and after 20 years, £294k. Leaving it for 30 years means it would be £745k, and 40 years, £1.75m.
Of course, there are no guarantees when it comes to investing, and investors could lose money, but it’s definitely a solid strategy with a track record of success.
Supercharging like Buffett
The above strategy’s great, but in the calculation above, I’m only using an 8% annualised return. A value investing strategy has continually outperformed all major indexes since the Second World War. As such, following Buffett’s advice, could supercharge any returns.
So what does Buffett tell us that could provide us with that cutting edge?
- “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price“. Buffett tells us to be greedy when others are fearful and vice-versa. It’s about buying stocks when the rest of the market isn’t interested.
- Focus on valuation. We need to do our research if we want to find undervalued stocks. We need to look at near-term valuations, but also run discounted cash flow calculations.
- Take long-term positions. Buffett is always investing for the long run, and that’s the thing about undervalued stocks, it might take time to reach their potential.
So by combining these two strategies, I’m looking at companies like Lloyds and Legal & General which could both be undervalued, but offer very attractive dividends.
Let’s imagine therefore that we can achieve low double-digit annual growth of 11%. Instead of having £91k after 10 years, we’d have £108k. And instead of having £294k after 20 years, we’d have £432k. It’s not guaranteed, of course, and investments could underperform. But, in general, the longer we continue the strategy, the more we could end up with.
This post was originally published on Motley Fool
