Warren Buffett is a self-made billionaire the world’s most famous investor. He is therefore looked upon as a source of inspiration by so many other investors worldwide. Today, I’d like to share with you several things I’ve learned on successful investing over the years from this proven master.
The power of compound interest
Buffett and his long-time partner Charlie Munger have transformed Berkshire Hathaway from a struggling textile manufacturer to a holding company with a market capitalisation greater than $550bn.
The performance of the stock has been extraordinary. A share could have been bought for $18 in May 1965, when Buffett took the reins at the company. Now the share price is hovering around $340,185.
So in slightly less than 55 years, he has managed an average rate of return of around 20% – more than double the average annual returns of the FTSE 100 index or the US stock market’s S&P 500 index.
Although this is an impressive difference in percentage returns, it’s only half the story. £1,000 invested 50 years ago in 1970 in an index fund with a 10% annual return would have become £117,390.85. The same investment in Buffett’s Berkshire would have grown to £9,100,438.15.
Here’s how the incredible effect of compounding comes into play! And it is possibly the primary reason Warren Buffett is one of the world’s richest people today.
How he has achieved his investing success
When we study Buffett’s life and investing philosophy, we note that he and his team haven’t necessarily used any ultra-complicated strategies to produce these eye-popping results. And simple luck does not explain Buffett’s success, either. As an investor, he…
- only buys stocks he plans to hold forever
- finds large large-cap companies with powerful brands
- likes investing in businesses that pay dividends
- loves to buy a company when its stock price is ‘on sale’ (or in other words, he’d buy shares in a company whose growth is currently undervalued by the market)
- has discipline and patience and he’s willing to learn and adapt
- does not try to predict the direction of broader markets, the economy, interest rates, or elections
There are no guarantees in investment returns. Yet the winning strategy he has been using for more than half a century may be appropriate for many retail investors too.
FTSE 100 shares
Although I do not judge myself against Warren Buffett, I believe learning from his investing style and discipline may help me to beat average market returns by a significant margin over the long run.
With that in mind, here are several large-cap shares I’m watching right now. I’d be willing to invest in them in 2020, especially if there is any dip in their share prices. I’d like to buy these high-quality and dividend-paying businesses when they trade on low valuations and keep them in my portfolio for many years.
- Aviva – dividend yield 7.3%, forward P/E 7.2, P/B 0.98
- Barratt Developments – dividend yield 3.8%, forward P/E 10.5, P/B 1.59
- BT – dividend yield 7.3%, forward P/E 7.2, P/B 0.98
- HSBC Holdings – dividend yield 8%, forward P/E 8.2, P/B 1.9
- Imperial Brands – dividend yield 10.5%, forward P/E 7.3, P/B 3.8
- Lloyds Banking Group – dividend yield 5.2%, forward P/E 8.5, P/B 0.88
- Royal Dutch Shell – dividend yield 10.5%, forward P/E 13.4, P/B 1.22
As always, don’t regard these as formal recommendations. Instead, view them as a starting point for more research. I’d recommend doing plenty of homework to decide if they may be appropriate for your own long-term investing strategy.