The FTSE 100 index has a current dividend yield of just over 4%. So, in theory, I could bung some money in a low-cost index tracker fund following the Footsie and collect that income.
But the investment would need to be £150,000 to receive dividend income worth £500 a month. So, I’d use the Warren Buffett method to help me invest and compound my way to a pot worth £150k.
Careful capital allocation
Buffett sees himself as an allocator of capital (money). And his main investment activities take place within his listed company Berkshire Hathaway. He said in the company’s 2020 letter to shareholders he wants Berkshire to “own all or part of a diverse group of businesses with good economic characteristics and good managers.”
But he doesn’t care whether Berkshire controls the businesses by owning them outright or simply holds some of their shares. And that’s great news for me because I can simply buy stocks as well — just like Buffett has.
So my plan for building up an investment pot worth at least £150,000 would involve trying to be a ‘mini-Buffett’. There’s no need to go out and start up another Berkshire Hathaway. All that’s required is to choose stocks carefully, buy them at opportune moments, and then hold for years as value compounds within each enterprise.
In the letter, Buffett sketched out a simple approach to investing. He said he looks for stock opportunities based on three things. The first is a company’s durable competitive advantage. The second is the capabilities and character of its management. And the third is price.
Simple, but not easy
It’s simple, yes. But is it easy? No. It’s important for me to do the work with regard to research and to make sure I’m buying stocks at a good-value entry point. Then, when holding, I need to monitor news flowing from my investee companies and regularly test it against my investment thesis. If it breaks down, it may be necessary to act, such as selling my stock holding.
However, Buffett reckons holding carefully-chosen shares requires “little” effort compared with owning companies outright. And he said: “You are awarded no points in business endeavours for ‘degree of difficulty’.”
Buffett and his long-time business partner, Charlie Munger, view Berkshire’s stock market shares as a collection of businesses. And they hold the stocks with the same tenacity they would apply to whole businesses they might control within Berkshire Hathaway. In other words, there’s no difference in their mindset between stocks and businesses. They are both long-term commitments purchased and owned with the intention of building wealth.
And that business-perspective approach to investing is one of the key parts of the Buffett method I’m using as I preside over my own mini-Buffett business ’empire’ within my own stock account portfolio.
But, of course, even as I try to emulate the great man’s approach, there’s no guarantee of positive investment outcomes — all shares carry risks.