The billionaire investor Warren Buffett has a spectacular track record when it comes to making investment decisions. Between 1965 and last year, for example, the compounded annual gain in the per-share market value of his company Berkshire Hathaway was 20.1%.
If I could match Buffett’s track record and achieve that return, then starting with £500 today I would have £3,000 after nine years.
Will the method work for me?
Making successful investment decisions can be harder than it looks. Buffett has much experience and is an expert when it comes to the stock market. So on one hand, it may seem overly optimistic to expect to get the same level of gains as him.
On the other hand, I have some advantages over Warren Buffett. His 20.1% compounded annual return was achieved across a period of over half a century. Some years were actually far better, but the average reflects the tough times inevitable in such a long timeframe. In a seven-year period, if I am lucky I may avoid the worst of the economic cycle.
As well as that, it is actually easier to do well in the stock market with a small sum than with a huge one like Buffett now works with. There are many more investment options available to the shareholder with limited funds. I can invest in small companies, but Buffett’s huge available funds do not make that a practical option for him any more.
Indeed, he has said that, if he was working with “just” a few million dollars and investing in small companies, he could make annual returns of 50%. Compounding those returns, the performance over the course of a few years would be even better. Buffett actually told a Berkshire shareholders’ meeting that the most successful phase of his investing career was close to the beginning.
Using the Buffett strategy
So, what would be the elements of Buffett’s investing style I would use to try and hit my £3k target?
First is sticking to what I know and can understand. Buffett always seeks to invest inside his “circle of competence”. I would diversify my money across multiple shares, like he does. That helps reduce the risk to me from any one investment choice doing very badly.
I would not see shares as numbers or amounts of money, but as parts of a business. That means I would never buy shares just because the price looked cheap: I would always try to find businesses I felt had strong prospects and then try to buy a tiny piece of them if the share price looked like good value.
Warren Buffett has held some shares for many decades and is a big believer in long-term investing. That is important when it comes to compounding, because the very nature of compound returns is that the impact becomes more significant over time.
Finally, I would wait for what I thought were great opportunities — not only good ones!
The post Here’s how I would use the Warren Buffett method and aim to turn £500 into £3k appeared first on The Motley Fool UK.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.