At 92, Warren Buffett has a net worth of around $94bn. And the method that got him there is one that anyone can follow.
According to Buffett, investing success doesn’t take a huge amount of intelligence. Patience and discipline are far more important on the road to getting rich.
Buffett’s approach has two parts. The first involves identifying predictable businesses and the second involves waiting for them to be available at attractive prices.
With both the FTSE 100 and the S&P 500 down this year, I think that there are some stocks that fit the bill. So here’s how I’d invest £1,000 using the Warren Buffett method today.
Top of my list is Alphabet (NASDAQ:GOOG). Both Warren Buffett and Charlie Munger have previously said that they regret not buying shares in the company a long time ago.
Google receives around 5bn search queries per day and accounts for around 84% of the global search engine market. It dominates the online search industry and I don’t see that changing any time soon.
With such a large market share, there might be a risk that the company’s growth is mostly behind it. But I think there are two things that offset this risk.
The first is that the organisation continues to generate strong revenue growth. Over the last five years, the company’s revenue has increased by an average of 23%.
Second, the stock is down 33% since the start of the year. At today’s prices, I think that the business can provide an attractive return just by growing steadily.
I think that Google is a great example of a stock to buy for my portfolio using the Warren Buffett method. That’s why I’d allocate £650 of a £1,000 investment into the stock.
Aviva
With the remaining £350, I have a few ideas on my radar. I think that Forterra, Howden Joinery Group, and Starbucks are all predictable businesses at attractive prices today.
Any of these would, in my view, be a good investment for me with £350. But looking to follow the Warren Buffett method, I’d invest in Aviva Preferred 8.375% (LSE:AV.B) shares.
I think this fits the bill perfectly in terms of predictability at an attractive price. And a lot of Buffett’s success has come from buying preferred stocks.
Unlike common stock, preferred stocks pay a fixed dividend that can’t be lowered. That makes their future cash generation highly predictable.
In the case of Aviva’s preferred, each share pays 8.375p per year. At today’s prices, that’s a return of 7.3% in perpetuity, which I see as attractive.
The downside to this type of investment is that the dividend won’t increase. And there’s a risk that rising interest rates might cause the stock to fall as the dividend yield looks comparatively less attractive.
For me, though, this isn’t a problem. A falling share price just gives me the chance to reinvest my dividends at a higher rate.
Even if the share price stays where it is, though, I can generate a good return by reinvesting the income I receive. Starting with £350 today, a 7.8% return means my investment could be worth £3,280 after 30 years.