When I was 19 or 20 years old, an army mate once said loudly in the bunk that stuck with me.
“You know what guys, Warren Buffett is the only guy in Forbes who built his entire fortune on ‘nothing’.”
Think about the big entrepreneurs on Forbes who sold software, ran furniture companies, built factories. Buffett? He did none of that.
Instead he simply invested in shares of businesses to accumulate his fortune. That comment planted a seed in me.
Today, Warren Buffett is one of the richest people in the world – a $149 billion networth. He built that fortune by compounding Berkshire Hathaway at a 19.9% rate a year for the last 60 years. That’s nearly double the return of the S&P 500 Index.
If you had put $10,000 into Buffett’s Berkshire Hathaway and held it until today, you would have turned your $10,000 into $392million. That’s impressive.
What surprised me was this. Warren Buffett didn’t invest the Wall Street way. He had no army of analysts. He was based in a quiet town of Omaha, Nebraska. And he sure didn’t use any complex trading systems.
What he did was simply look for great businesses that had a durable economic moat, trading at sensible prices.
For most of his career, he had a mentor, a coach and a close friend, Charlie Munger whom he could bounce ideas off of (yes, having a mentor and partners are important). Together, they looked for wonderful stock ideas to accumulate.
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Buffett’s Secret
Warren Buffett was doing what most people aren’t doing today: Value investing. And Buffett’s secret to achieving such enormous gains was to pick companies that could greatly grow their earnings without spending much additional capital.
Yet over the last 16 years, I’ve heard many investors tell me: “Willie, Warren Buffett’s approach is too slow for me.”
It’s not true.
You may not be patient enough, but I’m very sure you have plenty of time – whether you’re in your 40s, 50s, 60s or even 70s. His most famous example of patience came in the 1980s, when he was already 58 years old.
He bought a large stake in Coca-Cola, which became one of his best investments of all time. That business grew to one of his biggest positions today – and also paid him large dividends.
He didn’t need to trade too much, or start young to win big. Some of his best businesses were bought when he was much older – as long it was the right business and having the patience to hold.
Does Buffett’s value investing approach work? Yes. I’ve been using it as a fundamental approach to grow my passive income.
The thing is, if you can find long-lasting iconic businesses and know the most important financial ratios, it’s a sure-fire path to wealth.
I personally use Buffett’s approach to compound my investment portfolios over time. If you can identify a basket of great businesses over time, know one or two about financial ratios, it’s one of the most practical ways to build wealth.
The hard part? Not feel bored over it.
Why most investors give up too early
There will be times when such a strategy underperforms the market. During the dotcom bubble, Warren Buffett’s style seemed to stop working entirely (sounds familiar in this AI bubble?). He was even criticized.
Yet, after the big crash, Buffett went on to outperform the market.
Here’s the thing. We tend to give up right when a strategy looks like it isn’t working. Even skilled investors like Terry Smith can be tempted to say “this time is different.”, which doesn’t make sense.
But there’s something powerful about Buffett that most people overlook. He knew his strategy worked, even when it meant underperforming for a while. It was patience that truly compounded Warren Buffett’s capital.
Value investing isn’t for everyone
I don’t believe this approach is for everyone. But when we adopt this, it becomes one of the biggest life skills you can own. One that could enormously change your life.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
