Premium Bonds and gold both have their own individual attractive qualities. However, there’s one thing that links these assets which is discouraging me from buying. Instead, I’d much rather follow Warren Buffett’s tried and tested strategy he’s used to build wealth over the past six decades.
Warren Buffett’s strategy
Since he was a teenager, Warren Buffett has been an investor. He bought his first stock when he was in his mid-teens and, since then, he’s earned tens of billions of dollars investing in the stock market.
During this time, he’s stayed away from speculative assets. These are broadly defined as assets that don’t produce their own cash flow.
Gold and Bitcoin fit into these buckets. Premium Bonds technically do provide an income. But with the prize pot set at just 1%, and no guarantee of winning, I won’t be buying them for their income credentials.
Instead of speculating on the price of different assets, Warren Buffett has acquired stocks and shares. He has concentrated his efforts on buying businesses with large profit margins and substantial competitive advantages. Companies with these qualities tend to earn the most sustainable profits over time. And profit equals cash flow.
That’s the main reason why I’m following Warren Buffett and avoiding gold and Premium Bonds. I’m much more comfortable buying companies that produce profit and free cash flow.
What’s more, most stocks and shares offer investors a regular dividend. The average UK market dividend yield is around 3% at present. That means I’ll be paid to hold equities. By comparison, it usually costs money to hold gold.
Stocks to buy
While assets like gold have earned enormous returns for investors over the past 12 months, the market’s top Warren Buffett-like stocks have been better investments in the long run.
One example is the gaming company Games Workshop. Over the past decade, shares in this business have returned around 40% per annum. That suggests £1,000 invested in the stock a decade ago would be worth over £50k today.
Investors may have been able to earn similar returns on some other assets, but there’s no guarantee this will continue. However, with a company like Games Workshop, which is making money from its customers every day, the chances of continued investment success, in the long run, are much higher.
There are plenty of other examples of companies that have earned large returns for investors in the past. I believe these firms will continue to earn large profits. Companies such as Fevertree and Jet2 have been terrific investments in the past. As long as their competitive strengths remain, I think they’ll continue to earn high total returns for their shareholders as we advance.
That’s why I think following Warren Buffett rather than buying Premium Bonds or gold could be the better strategy for long-term investment success.