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UK share prices remain highly volatile as anxiety about the global economy persists. But it’s not all bad news for investors. Turbulence like this gives opportunistic investors a chance to create long-term wealth like Warren Buffett.
The FTSE 100 falling again after more mixed economic data from China. It has now fallen 4% from its August highs to current levels of around 7,230 points. Another stock market crash cannot be ruled out as jitters over high inflation and rising interest rates continue.
If a full-blown correction does happen, I’ll rush over here with my checkbook to buy some cheap deals. It’s a strategy that has helped Warren Buffett amass a fortune north of $100 billion.
Buy low, sell high
Investing when stock prices are falling doesn’t feel comfortable. Humans are gregarious animals and have survived for thousands of years by existing in well-coordinated camps and societies. So acting against the herd seems unnatural and, at a basic level, wrong.
But if an investor wants to get returns that exceed the market, he has to shut down that voice and think differently. This rule applies when stock markets rise as well as when they fall.
Perhaps Warren Buffett’s most famous maxim is that investors should “to be fearful when others are greedy, and greedy when others are fearful“. The rise and rise of it Berkshire Hathaway investment company has been proving for decades how successful this tactic can be.
Basically, Warren Buffett makes money by exploiting the herd mentality of investors. When buying activity reaches a fever pitch and the market appears to have topped, he cashes out.
Conversely, the Omaha native will shop at bargain prices when selling activity exceeds rational levels and quality stocks can be bought cheaply.
I myself have been buying undervalued stocks after the major declines in 2022. Although it seems unnatural to me, I believe in the solid long-term returns that investing in stocks can bring.
Indeed, we at The Motley Fool calculated that Berkshire Hathaway has delivered an average annual return of 20% since 1965. This number is well above the long-term average of 8% enjoyed by the broader market.
Earn a million
Like any investor, there is no guarantee that I will make a huge pile of money investing in stocks. Of course, markets can go down as well as up.
However, as an investor, I find the risk-reward profile of adopting Warren Buffett’s investment strategy very attractive. And it has the potential to create enormous wealth from nothing.
Let’s say I’m 40 years old and I plan to retire when I’m 65. If I invested just £200 in UK shares using the Berkshire Hathaway model, I could, based on this average annual return of 20%, earn more for a million for retirement. To be precise, I would have earned £1,132,755.
There are other key Buffett strategies that investors can use to build wealth. Finding companies with significant competitive advantages, such as stocks that offer great value. But I believe that buying a stock when everyone else is selling is a solid first step to high returns.