Image Alt

The Investing Box

  /  Editor's Pick   /  No long-term savings? I’d use the Warren Buffett method to build wealth

No long-term savings? I’d use the Warren Buffett method to build wealth

Warren Buffett at a Berkshire Hathaway AGM

A lot of people realise at some point that their savings account adds up to a big fat zero. By contrast, legendary investor Warren Buffett has a lot of zeros in his bank account – as in billions!

Buffett built his wealth from scratch by careful, considered investing in well-chosen businesses. If I was starting from zero today, I think applying his technique could also help me build wealth over the long term.

Steady approach

Buffett invests using a long-term approach. He buys into businesses he thinks have outstanding long-term potential relative to their current share price, then holds his stake for years, or decades, at a time.

Even with no savings, I could start doing that by putting aside a small amount of money regularly into a share-dealing account, or Stocks and Shares ISA. By regularly drip-feeding an amount that matched my own financial circumstances, I could build up an investment fund from a standing start.

Risk and reward

One mistake people sometimes make when they have little to invest is taking big risks, hoping for large rewards. If anything, I think with little to invest it makes sense to take even fewer risks.

Buffett is a billionaire, so losing a million pounds here or there is a drop in the ocean for him. But for many small investors, a loss of just a few thousand pounds could wipe out a large part of their portfolio.

Even with his billions, Buffett is laser-focused on managing risk in his portfolio. When choosing shares to buy, if he feels uncomfortable with the risk he does not invest. I think that approach makes sense for a small private investor like me too.

Value and dividends

But how might buying shares actually help me build wealth? Owning shares can potentially generate money in one of two ways.

The first is an increase in the value of the shares themselves. For example, the biggest holding in Buffett’s portfolio is Apple. The Apple share price has increased 243% over the past five years, so Buffett’s shares are worth more than triple what they were five years ago. That is a paper gain though, until the shares are sold.

The second way I could build wealth from owning shares is if I earn dividends. Those are basically how a company shares its profits with shareholders. Dividends are never guaranteed but can be substantial. Right now, for example, Vodafone yields 10.7%. So if I invest £1,000 in Vodafone shares today, hopefully I will earn £107 annually in dividends.

Getting started

Buffett has spent his career keeping things simple. He has raised funds to invest, put them into well-run businesses with strong prospects, then sat back for years and waited in the hope of accumulating wealth.

On a smaller scale, the same approach should also help me build wealth over time. But for that to happen, I need to invest – and make the right choices.

The post No long-term savings? I’d use the Warren Buffett method to build wealth appeared first on The Motley Fool UK.

Don’t miss this top growth pick for the ‘cost of living crisis’

While the media raves about Google and Amazon, this lesser-known stock has quietly grown 880% – with a:

  • Greater than 20X increase in margins
  • Nearly 60% compounded revenue growth over 5 years – more than Apple, Amazon and Google!
  • A 3,000% earnings explosion

Of course, past performance is no guarantee of future results. However, we think it’s stronger now than ever before. Amazingly, you may never have heard of this company.

Yet there’s a 1-in-3 chance you’ve used one of its 250 brands. Many are household names with millions of monthly website visitors, and that often help consumers compare items, shop around and save.

Now, as the ‘cost of living crisis’ bites, we believe its influence could soar. And that might bring imminent new gains to investors who’re in position today. So please, don’t leave without your FREE report, ‘One Top Growth Stock from The Motley Fool’.

Claim your FREE copy now

setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);

More reading

  • Buying 10,810 cheap Tesco shares would give me dividend income of £1,200 this year
  • Scottish Mortgage holds Nvidia, Tesla and Amazon yet it’s still falling. Should I sell?
  • How I’d invest £20k in a Stocks and Shares ISA to build long-term wealth
  • The Capita share price is near a 27-year low! Is this a rare chance to get rich?
  • A hidden ex-penny stock to buy for the electric vehicle revolution

C Ruane has positions in Vodafone Group Public. The Motley Fool UK has recommended Apple and Vodafone Group Public. 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.