Warren Buffett is a multi-billionaire today, and he’s achieved it through long-term investing in the stock market. Those who have bought shares in his Berkshire Hathaway investing company have profited nicely along the way.
Between 1965 and 2021, Buffett reckons Berkshire Hathaway produced compounded annual returns of around 20% per year. That’s massive by investing standards.
So which aspects of Buffett’s investing approach do I adopt when I invest in UK shares? First and foremost is time, which builds up the benefits of compounded returns.
One of my favourite pieces of Buffett advice is: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” He goes on to describe his favourite holding period as “forever.”
Imagine having invested £1,000 in Berkshire Hathaway back in 1965. Compounded at 20% per year, that sum would have built up to a staggering £27m by 2021. I think I can see how Buffett got his billions.
Compounding magic
Now that’s a period of 56 years. And though I’m in it for the long term, I don’t have a 56-year investing horizon. But even over 20 years, £1,000 invested today at 20% per year would turn into £38,000. And if I invested an extra £1,000 every year, I’d end up with £240,000.
Of course, achieving 20% a year today is all but impossible for me. And there are never any guarantees of any positive returns from buying shares — I fully expect to lose money some years.
But looking at Buffett’s past returns does make the benefits of compounding over the long term crystal clear. And if I can achieve a relatively modest 5-6% per year, I’ll be happy.
So which shares should I actually buy? Time for another Buffett quote: “It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”
The Warren Buffett filter
That still leaves me trying to find “wonderful” companies. But even just using Buffett’s 10-year rule helps me narrow down the choices considerably.
I have toyed with investing in the cryptocurrency sector. Not through buying the various coins themselves, but by investing in a crypto miner like Argo Blockchain.
But would I want to hold shares in a crypto miner for 10 years? Or forever? Erm, no. I’d be planning to watch how cryptocurrencies go, and sell in a year or two. Adopting Buffett’s advice means I should rule them out.
The same goes for biotech companies that have boomed and busted during the pandemic. Some now look good value for the next few years of endemic Covid. Again, the Buffett philosophy tells me no.
Stick to what you know
Sticking to what you understand makes a lot of sense too. It’s tricky enough identifying wonderful companies when I understand their businesses well, never mind new techie stuff that’s beyond me.
So these pieces of Buffett advice sum up my approach to building wealth. I’m seeking companies that look so good I could buy them today and forget about them for 20 years. And then actually keep them for 20 years, or more, and let compounding weave its magic.