UK share prices remain highly volatile as worries over the global economy persist. But this isn’t all bad news for investors. Turbulence like this gives opportunistic investors a chance to build long-term wealth like Warren Buffett.
The FTSE 100 is sinking again following more patchy economic data from China. It’s now fallen 4% from August’s highs to current levels, around 7,230 points. Another stock market crash can’t be ruled out as jitters over high inflation and rising interest rates continue to linger.
If a full-blown correction does happen I’ll be rushing in with my chequebook to buy beaten-down bargains. It’s a strategy that has helped Warren Buffett amass a fortune north of $100bn.
Buy low, sell high
Investing when share prices are falling doesn’t feel comfortable. Humans are pack animals and have survived thousands of years by existing within highly-coordinated camps and societies. So acting in a contrary way to the herd feels unnatural and, at a base level, wrong.
But if an investor wants to make market-beating returns they have to shut down this little voice and think differently. This rule applies when stock markets are rising as much as when they are falling.
Possibly Warren Buffett’s most famous maxim is that investors should “be fearful when others are greedy, and greedy when others are fearful”. The rise and rise of his Berkshire Hathaway investment firm over the decades proves how successful this tactic can be.
20% returns!
Essentially Warren Buffett makes money by capitalising on investors’ herd mentality. When buying activity reaches fever pitch and it looks like the market has topped he cashes out.
Conversely, the Omaha native will shop for bargains when selling activity has exceeded rational levels and quality stocks can be picked up cheaply.
I myself have been buying beaten-down stocks following heavy falls in 2022. Even though it also feels unnatural to me, I believe in the robust long-term returns that share investing can generate.
Indeed, we at The Motley Fool have calculated that Berkshire Hathaway has delivered an average annual return of 20% since 1965. This figure is well above the long-term average of 8% that the broader market enjoys.
Making a million
Like any investor, there’s no guarantee that I’ll make a fat stack of cash by investing in stocks. Markets can go down as well as up, of course.
However, as an investor myself I find the risk-to-reward profile of adopting Warren Buffett’s investing strategy highly attractive. And it has the potential to build a huge amount of wealth from nothing.
Let’s say I’m 40 years old and have plans to retire when I hit 65. If I invested just £200 in UK shares using the Berkshire Hathaway model I could, based on that 20% average yearly return, have made more than a million to retire on. I’d have made £1,132,755 to be more exact.
There are other key Buffett strategies that investors can use to build wealth. Finding companies with significant competitive advantages, for example, and stocks that offer deep value. But I think buying shares when everyone else is selling is a solid first step to generating strong returns.