Forget day trading! I’d use Warren Buffett’s ‘secret sauce’ to build wealth
Warren Buffett released his annual Berkshire Hathaway letter to shareholders recently. There were many words of wisdom for investors to ruminate upon, particularly under a section titled The Secret Sauce.
In this, he outlined some winning investments he made decades ago, including Coca-Cola. The cash dividend Berkshire received from its shares of Coke in 1994 was $75m. By 2022, the dividend had increased to $704m.
Importantly, individual investments such as this have more than made up for the number of losing stocks he’s picked over the last 30 years. Buffett says the lesson for investors is this: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”
Buy and hold
The secret sauce then is to buy and hold. Or as Buffett puts it: “We seek out good long-term
investments and stubbornly hold them for a long time.”
Of course, this is the opposite of day trading, which is very much short term. According to data from investment platform eToro, around 80% of day traders lose money over the course of a year. More than 75% quit within two years.
By contrast, the Oracle of Omaha’s buy-and-hold investing strategy has made him one of the world’s wealthiest people. And it has done so with surprisingly few big winning stocks.
Again, day trading is the opposite of this. I need to find lots of winning trades, day in and day out. Or at least my specialist trading software does. That means zero blooming flowers over time and no rising dividends to turbocharge compounding wealth.
In this year’s shareholder letter, Buffett also cautions investors to avoid “froth” in stock markets. He’s referring to the speculative hype that periodically sends stock valuations too high, frothing them up.
Buffett’s mentor, Benjamin Graham, famously said: “Day to day, the stock market is a voting machine. In the long term, it’s a weighing machine.” I think this perfectly encapsulates how the stock market works, both in the short term and the long term.
In the short run, it can be a popularity contest. That’s where day traders operate — acting on short-term trends and gyrations. However, over time, the market will weigh a company based on its fundamentals. On how heavy it becomes, essentially.
Shares of Amazon fell 80% in 2000. Responding to this in his annual letter to shareholders, Jeff Bezos used Graham’s famous quote. He noted there’d been a lot of voting during the late-90s dotcom bubble, and not much weighing.
But the Amazon founder said: “We’re a company that wants to be weighed, and over time, we will be — over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.”
Bezos was right. Over time, the market would go on to weigh Amazon heavily. Today, even after a 50% share price decline, the company is valued at nearly a trillion dollars.
The key then is to find companies that are getting heavier over time. That is, enterprises that are growing their earnings and dividends consistently over a long period. Then wait patiently for the right moments to pick up shares — and hold them stubbornly!
The post Forget day trading! I’d use Warren Buffett’s ‘secret sauce’ to build wealth appeared first on The Motley Fool UK.
Our analysis has uncovered an incredible value play!
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
- Should I buy Manchester United shares amid takeover speculation?
- 2 cheap FTSE 100 shares! Should I buy them today?
- 3 AIM shares that are worth a look right now
- Could Warren Buffett buy out Rolls-Royce?
- With oil below $85, what’s next for the BP share price?
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon.com. 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.