Warren Buffett’s approach to investing is what’s put him on many investors’ radars. Despite starting with a relatively modest sum, the ‘Oracle of Omaha’ built a multi-billion-dollar fortune by investing in high-quality businesses at bargain prices.
Despite its simplicity, this strategy is how he’s averaged a whopping 20.1% annual return. And copying his method could be the key to building a sizable nest egg, even starting from as late as 50.
With the stock market currently going through some turbulence, many shares seem to be offering outstanding value at low prices. In my opinion, that makes now potentially the perfect time to start the wealth-building process.
Warren Buffett’s long-term strategy
For Buffett’s strategy to work, it requires patience. Becoming a long-term investor means operating with a time horizon of at least five to 10 years. Why? Because using this approach isn’t about buying tickers but rather investing in businesses. And businesses need time to achieve their full potential, which never happens overnight.
Obviously, investors starting in their 50s don’t have as long to establish a nest egg as someone that’s just entered the workforce. But since most individuals retire around the age of 65, that’s still 15 years to leverage the power of compounding – more than enough to deploy Buffett’s strategy.
Buying undervalued high-quality stocks
Buying and holding any old stock isn’t going to cut it. In fact, without proper research and due diligence, odds are that blindly purchasing shares in a business will destroy wealth, not create it.
Wealth in the stock market is built through a combination of growth and value. And it’s the companies that can deliver both which often end up being winners.
These are the businesses with:
- Solid financial positions to weather short-term disruptions
- Proven products or services that are rising in demand
- A collection of competitive advantages that prevent their rivals from stealing customers
But investing in a high-quality stock at any price can also end in disaster. It’s entirely possible to stumble upon an amazing company that’s a terrible stock. Buffett is not only looking for wonderful businesses to buy but also for the best price.
Fortunately, finding undervalued investment opportunities in 2022 has become far more straightforward, thanks to the ongoing stock market correction.
Building a nest egg
Replicating Buffett’s returns is obviously easier said than done. But even if an investor can only match the stock market’s 10% average annual return, that’s still enough to build a decent nest egg.
In fact, investing £1,000 a month at a 10% return for 15 years will build a portfolio worth roughly £414,470. Withdrawing 4% from this each year transforms into a £16,578 passive income per year.
This figure is being calculated assuming that the stock market doesn’t decide to throw another tantrum. In reality, another crash or correction is likely to occur at some point in the future that could significantly delay the wealth-building process. But this calculation demonstrates the potential returns an investor can achieve by following Buffett’s investment strategy.
The post No savings at 50? I’d use Warren Buffett’s method to invest appeared first on The Motley Fool UK.
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