Zero savings? Here’s how an investor could use the Warren Buffett method to build wealth
Warren Buffett, the legendary ‘Oracle of Omaha’, is finally stepping down as CEO of Berkshire Hathaway after more than six decades at the helm.
As tributes pour in for the world’s most famous investor, it’s fitting to reflect on how his approach can help Britons — especially those with zero savings — build wealth from scratch.
And that’s a pressing issue. According to recent surveys, around one in three UK adults have no savings or less than £1,000 in their bank accounts. So many Britons could benefit from knowing more about Buffett’s teachings.
Of course, starting from nothing isn’t easy. And it’s impossible to invest with nothing. In order to follow Buffett’s rules, a would-be investor would need to allocate some of their salary to their investment journey. This, ideally, would be a monthly contribution.
Here’s how it’s done
Buffett’s method is simple and accessible. He’s always said the first rule of investing is “don’t lose money”. This is a lesson that matters even more when you’re starting from zero.
Buffett’s focus has always been on buying shares in high-quality businesses, not just seeing them as stocks, and holding them for the long term. He looks for companies with strong brands, reliable earnings, and the ability to reinvest profits to fuel future growth. This approach allows the power of compounding to work its magic.
Building on this idea of not losing money, Buffett has told us to “be fearful when others are greedy, and greedy when others are fearful.” When markets are gripped by panic and share prices tumble, Buffett sees opportunity, not danger.
He believes widespread fear creates bargain prices for patient investors. Conversely, chasing the crowd during euphoric times often leads to overpaying and disappointing returns. Buying quality stocks at lower prices, rather obviously, can help prevent large losses.
Of course, there are risks. Even great businesses can face setbacks, and share prices will fluctuate. But by focusing on value, quality, and not overpaying, an investor can tilt the odds in their favour. And in investing, it’s often about fine margins.
A Buffett-style stock
Berkshire Hathaway hasn’t had many UK holdings in recent years. That’s quite a sad reflection on the economy. However, if it did, I wonder whether it would consider investing in Melrose Industries (LSE:MRO).
Melrose Industries has lagged some sector peers in the post-pandemic recovery, largely due to persistent industry-wide supply chain disruptions that have constrained growth.
Currently, the company trades at a forward price-to-earnings (P/E) ratio of 14.1 times based on adjusted diluted earnings. And this is interesting as Melrose is targeting ambitious growth, aiming to increase earnings per share by 20% annually through to 2029. This would mean a price-to-earnings-to-growth (PEG) ratio of 0.7 — a fraction of its peers.
Growth, the business says, is underpinned by strong positions on all major aircraft engines and with 70% of sales coming from sole-source contracts. This a hallmark of quality and pricing power.
Net debt stands at around £1.3bn, which is higher than ideal but remains within management’s target leverage range. And while Melrose’s transformation has improved margins and cash flow, execution risk remains as the company completes its restructuring and seeks to deliver on its ambitious five-year targets.
It’s a stock that I’ve been adding to my portfolio. I certainly think it’s worth broader consideration.
The post Zero savings? Here’s how an investor could use the Warren Buffett method to build wealth appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
More reading
- 2 UK stocks I think could beat the index average in the second half of the year
- I’m backing this FTSE 100 industrial stock to outperform Rolls-Royce
- Up 12% in a month! Is this overlooked FTSE growth share the next Rolls-Royce?
- Could the FTSE 100 break 10,000 this year? Some analysts are saying yes!
- Value stocks in aerospace… yes, please!
James Fox has positions in Melrose Industries Plc. The Motley Fool UK has recommended Melrose Industries Plc. 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.
