The best way for me to build wealth over the long term is to spend less than I earn. Well, almost the best way. Because it’s what I do with the savings that really counts, and Warren Buffett could help here.
In my younger days, I always thought finding the best interest rate on offer at a bank was the best option for my savings. Don’t get me wrong, this could still be an appropriate strategy. It’s certainly a ‘safe’ option as this is a guaranteed return, and isn’t subject to price fluctuations when the market is open.
But a savings account has other risks. For one, inflation today is well above the interest on offer at a bank. This means the real return is actually negative. In other words, my savings would lose purchasing power.
Then there’s ‘opportunity cost’. Simply, this means I’m losing out on potentially higher returns by not investing my savings elsewhere.
Let’s take some inspiration from Warren Buffett to see how I can invest my savings instead.
Warren Buffett’s strategy
Warren Buffett is probably the most famous investor around. He grew Berkshire Hathaway into the behemoth it is today, standing at a market value of about $640bn. Together with his business partner, Charlie Munger, he’s spent decades investing to grow the value of Berkshire Hathaway for shareholders.
I previously wrote about Munger’s influence on Buffett’s investing strategy here. As a quick recap, Munger persuaded Buffett to focus more on quality companies over deep-value businesses selling for less than intrinsic value. A quick turnaround sale could pay off in a big way if the original buy price was right. Buffett often referred to this as ‘cigar-butt investing’ as it was a shorter-term trade.
But there’s another crucial factor to Buffett’s strategy, which again came from Munger’s influence. It’s captured in the following quote: “Our favourite holding period is forever.”
In fact, Buffett has spent his lifetime trying to convince people to invest for the long term. This is the key investment strategy that I wish I’d learnt sooner. It works for Berkshire Hathaway, so I’m sure I can use it too.
Thinking back, if instead I hadn’t looked around for the best interest rate on offer at a bank, I had invested in the stock market, I may have been wealthier for it today.
Where should I invest?
The first thing I should have done is use a stocks and shares ISA. There’s a great article on this here. In short, it’s a way to invest without paying any tax on capital gains and income.
But there are many investing options to consider after opening an ISA. I primarily use growth investing, looking for companies that can be much larger in the future. But I also buy high-yielding dividend stocks to increase my passive income.
One final way I could have improved my wealth is to buy an index fund that tracks the stock market. Or I could have simply bought shares of Berkshire Hathaway 10 years ago and earned an annualised return of 14%, letting Buffett do the investing for me.
As long as I invest for the long term, there’s a good (if not guaranteed) chance my returns would beat an interest rate at a bank.