When you look at billionaire Warren Buffett, you quickly notice that he seems different from most of us. In fact, Buffett started out with neither savings nor stocks. He saved money that he had earned delivering newspapers as a schoolboy to take his first steps on the stock market. The rest, as they say, is history – and an incredibly lucrative story at that!
If I had no savings and my goal was to grow my wealth, I would use the Warren Buffett method as follows.
Understanding what investing is all about
Many people view investing as speculation, buying stocks in companies they don’t fully understand in the hope that the price will go up.
Buffett’s approach is different. He views a stock as a tiny portion of a company (which it is), so he looks for companies that he thinks are excellent and have attractive prices, and then buys their shares with the goal of holding them for the long term.
By focusing on areas he understands, Buffett is more likely to know what he is getting into. However, even the best company can run into unforeseen difficulties, so he always diversifies his portfolio across more than a few companies.
Buy and hold
There are two ways to make money with this approach (although this is not necessarily the case, as stock prices can go down as well as up).
One of them is an increase in the share price. Buffett’s share of Coca-Cola (NYSE: KO) illustrates this point. He spent several years building a stake in the soft drink maker, with the last purchase coming 30 years ago (Buffett is truly a long-term investor!)
As he said in his letter to his company’s shareholders this year Berkshire-Hathawayhis investments in Coca-Cola and American Express “are meaningful values and also illustrate our thought processes.”
His Coca-Cola shares cost $1.3 billion. Now they are worth $25.6 billion. Both numbers are big – few people can spend $1.3 billion on stocks! But the key point is the price growth of 1,969%. If I had bought at the same time as Buffett, even on a much smaller scale, and held until now, I would have seen the same price increase.
This shows how beneficial it can be to invest in a company that has a competitive advantage in a market with sustained strong demand and whose shares are offered at an attractive price.
Dividend machine
But what about the second way Buffett made money (lots of it!) with his Coca-Cola investment?
Dividends are never guaranteed. But Coca-Cola pays them regularly. In fact, the company has increased its dividend per share annually for over 60 years. This year, it will pay out $8.4 billion in dividends to its shareholders, including Buffett.
The $1.3 billion investment now earns him over $700 million in Coca-Cola dividends annually. That’s completely passive income – he just has to keep the shares he already owns!
Find great companies to invest in
Coca-Cola is a successful company, but like all companies, it faces risks, ranging from declining consumer enthusiasm for sugary drinks to high energy costs that make production more expensive.
Buffett hasn’t bought Coca-Cola shares for 30 years. But I use his method Now to try to find cheap stocks to buy!
The post “Without savings, I’d use the Warren Buffett method to get rich” first appeared on The Motley Fool UK.
Further reading
American Express is a promotional partner of The Ascent, a Motley Fool company. C Ruane does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such 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.
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