If we’re a bit older but didn’t have any savings, it would be easy to just throw my hands up and think it’s too late and not worth bothering. But I’d never say never, and offer billionaire investor Warren Buffett as my example.
Buffett took charge of Berkshire Hathaway back in 1965. So yes, he’s had plenty of years to build his wealth — and that of his shareholders.
But he publishes his complete investing record every time he releases his annual letter to Berkshire Hathaway shareholders. And if we look back over just 10-year periods, we can uncover some remarkable results.
10-year returns
I’ll take just the most recent 10 years as an example, a period when stock markets have not performed at their best. A £1,000 investment in Berkshire Hathaway at the end of 2011 would have grown into £3,923 by the end of 2021 (at constant exchange rates, for simplicity). Even over such short a period, Buffett was able to almost quadruple his investors’ cash.
Nobody can do that well every 10 years. And with a relatively short investing horizon, buying shares is riskier than when we have multiple decades at our disposal. We can’t escape that.
20% per year
But since 1965, Buffett has produced an average annual return of 20.1%. If I invested just £100 per month for 10 years at that rate of return, I’d expect to end up with £34,600 pot. If I could manage £500 per month, I should finish with over £173,000.
That’s why I’d always follow the Buffett method of investing to build wealth, whatever age I started. But what should I actually do? I think that comes down to a few key guidelines.
Buffett guidelines
Buffett strives to minimise risk. To quote his famous first two rules of investing: “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.”
For me, avoiding risk includes steering clear of companies with big debt. We’ve seen through the pandemic how much damage that can do. I also keep away from tiny growth stocks that aren’t making any profit yet — so-called ‘jam tomorrow’ investments.
There’s also risk in buying something I don’t properly understand. And that’s also key to the Buffett approach. He’s kept away from high tech because he doesn’t understand it. But he does understand insurance stocks, and has made healthy profits by investing heavily in them.
Only 20 buys
Buffett also suggested one way to focus our minds on only buying the best: “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about.”
That would focus my mind, for sure. Alternatively, I suppose I could just buy Berkshire Hathaway shares.