How would I invest £10,000 today, using the Warren Buffett method? Since the self-made billionaire took the helm at Berkshire Hathaway in 1965, he’s achieved an average annual return of 20%.
If I could achieve the same, I could grow my £10,000 into more than £380,000 in 20 years. Now I’m certain I won’t manage that and I seriously doubt Buffett can do it again in today’s conditions.
But even if I could manage 6% per year, I could still grow my cash into £32,000 in 20 years — without adding a single extra penny.
Buffett firmly avoids one key mistake. He never tries to time the market. He just doesn’t dive into, and then leap out of, each hot thing as it booms and busts. Sadly, I’ve known investors who’ve tried that, but they’ve spectacularly failed.
Buffett always stresses seeking value rather than trying to get the timing right. In his most recent letter to Berkshire Hathaway shareholders, he said: “Our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO.”
Quality companies
He is also famously sceptical about cryptocurrencies: “The difference between productive assets and something that depends on the next guy paying you more than the last guy got.”
So I would always start by looking for companies that produce goods and services that people want to pay good cash for. I want to see some of that cash making it to me in the form of dividends. And I want competent managers who don’t rack up debts and overstretch their companies to look good in the short term.
In short, I want to buy shares in companies that pay me directly. I don’t want to buy something that’s just a point on a chart in the hope that someone else will pay me more for it in the future.
Buy what you know
Buffett also focuses on businesses he understands. He is the embodiment of the old investing rule to buy what you know. I think that can be a bit off-putting though. I mean, most of us have little chance of understanding that much about how any company operates.
But I don’t think we need detailed knowledge. I have a general understanding of how housebuilders work, for example. They buy land, buy bricks and stuff, put it all together to make houses, and sell them. And there’s a chronic housing shortage in the UK. That’s all the understanding I need.
By contrast, I’ve no idea how most of these metaverse things work, or where they’re going to get their money from next year. So I buy housebuilder shares, but I don’t invest in social media technology.
Diversify
Things can always go wrong, with a company or a sector. So, like Buffett, I will always spread my investments across a number of different areas. That means when bank shares struggle, the damage to my investments is lessened because I have only a small portion of my cash in that sector.
To sum up, I’d spread my £10,000 across a number of companies in different sectors. And I’d carefully avoid companies whose business essentials are too difficult for me to understand. And then I’d reinvest my dividends for even better long-term returns.