Image source: The Motley Fool
Lots of investors fascinated by Warren Buffett – and this is understandable. The Sage of Omaha has become one of the richest people in the world due to its ability to identify highly profitable investments.
Buffett already has a lot of wealth that can make investing easier. But what about those who have only modest amounts of money to invest? Here’s how I would try to use Buffett’s method to try to build my wealth over time.
Expect great, not just good
Instead of rushing with the first investments, which looked promising, I would do what Buffett does, and wait until there is one that, in my opinion, was not just good, but great. It could take years – in which case, like Buffett, I would have waited patiently.
One of the keys to building his wealth was his focus on buying stocks of companies with prospects he believes are not just good but great.
Why is this important? This is partly due to the long-term impact of income compounding. Imagine being able to buy a stock that is growing 5% every year, or a stock that is growing 8% every year. The difference may not seem huge. But over time, the impact of complex growth will mean that an 8% share increase will lead to much better returns.
After 25 years, £ 1,000 invested in a stock with an annual increase of 5% should cost £ 3,481. But the same money invested over the same time in a share with an annual increase of 8% should rise to 7,340 pounds. That’s more than twice as much.
Warren Buffett views stocks as part of the business
Some investors, starting from scratch, are trying to move forward quickly, taking big risks. It is common to invest in stocks of companies that they do not really understand, for example, because they think that the price chart shows that it is undervalued.
Buffett does not buy stocks that way. Instead, he is looking for a business that he believes has attractive long-term prospects, such as Apple or Coca-Cola. He then ponders whether the current stock price allows him to buy a piece of business at an attractive price.
I think it’s helpful when it comes to building my own portfolio over time in order to increase my wealth. If I can find businesses that seem to have great prospects for years to come, I have no reason to keep jumping and breaking away from their stocks in response to every market movement.
Instead, like Buffett, I would adopt a “buy and hold” philosophy. If I view my stocks as a tiny stake in a business that has a strong future, I would most likely stick to them. So I could hopefully see good business results reflected in the increase in stock value over time.