Who doesn’t want to retire at 50? I certainly do. But I also want to be able to make the most of my retirement. To do that, I’ll have to work hard and make some wise investments. Luckily for me, the world’s greatest investor, Warren Buffett, has outlined in books, interviews, letters and talks, exactly how he approaches the task of making money.
The goal
To retire at 50, I need enough money to live comfortably for the rest of my life. I think £30,000 per year is plenty (at current prices). For that, I will need to take the pot of £10k I’ve worked hard to save and turn that into £1.5m in 25 years. It’s difficult, of course, but not impossible with the magic of compound growth where I add my returns to my pot and earn interest on my interest.
The S&P 500 has increased, on average, by 10.9% annually since 1970. At that rate, my £10k would double every 6.6 years and take over 50 to become £1.5m
I need returns of 20% or higher to meet my goal, and a high-risk investing strategy. I need potentially fantastic companies in my portfolio. How does Buffett find them?
Fundamentals and share price.
Buffett is a value investor and value investors take a different philosophical approach to investing. They always remember that they are buying part of a company, not just a derivative of its worth. This means Buffett only buys companies that he would personally want to own.
To work this out he looks at:
- a company’s cash flow
- Its debt
- Its revenue and management
If all of these are positive and the company is growing, I know I should have a good one.
Timing is everything
It’s not enough to have these fantastic companies. To reach that amazing 20% annual return, I need to hedge my bets and buy when their shares are ‘on sale’. Buffett himself likes to wait months, even years before buying a share.
For example. Berkshire Hathaway (NYSE: BRK-B) is an amazing company by any measure.
It’s debt, while high, has only ever been a fraction of its cash flow which, since 2007, has been in the tens of billions. Berkshire Hathaway itself has, on average, increased in value by 20% a year since 1965.
But the 2020 Covid crash temporarily knocked $50 off the value. The 2008 financial crash but it by 1/3rd.
Sudden crashes in the share price make for the perfect time to build a position. Even after those crashes, Berkshire Hathaway was still an amazing company.
Warren Buffett himself once advised that it was good to be fearful when others are greedy and greedy when others are fearful. If I wait for the perfect moment and conserve my capital, I can boost its growth potential by buying an amazing stock when other investors are holding back and it’s undervalued.
Conclusion
The best part of this investing strategy is that time is on my side. Because I’m looking for the perfect moments to invest in the perfect companies. I need to do is focus on my research and be patient.
This is a very risky strategy and I will need to be absolutely certain of my choice, as well as firm in my conviction. But this is how Warren Buffett made his fortune. I’m hoping that it will be how I make mine.