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How I’d invest like Warren Buffett in a Stocks and Shares ISA in 2023

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Image source: Getty Images

Investing ace Warren Buffett bought his first stock aged 11. But anyone – no matter their age – can start investing in the stock market today to begin building wealth. Opening a Stocks and Shares ISA is an ideal first step.

Starting small

The annual ISA allowance today stands at £20,000. For sure, that’s a sizeable sum of money. But the lower limit is often as low as £25, or even £5. That’s because there’s a growing number of investment platforms that offer commission-free trades. So it’s never been easier to get started with a modest sum of money.

As mentioned, Warren Buffett first invested in stocks at 11 years of age (in 1942). He purchased three shares of a company called Cities Services. The cost was $114.75, which is the equivalent of around $2,000 (£1,660) today. It required all of his savings.

But back then, there were myriad fees and paperwork that today’s investor doesn’t have to worry about. Now, the stock market is increasingly open to anyone starting out with almost any amount.

Compound returns

Arguably the most important investing lesson Warren Buffett learned early on was the miracle of compound interest. That is, the ability of money to earn interest upon interest, like a snowball getting ever larger. Compounding is the process through which large sums of money are built over time.

He is often quoted as saying: “My wealth has come from a combination of living in America, some lucky genes, and compound interest”. The power of compound interest cannot be overstated.

To demonstrate, assume I start with nothing, but commit to putting £100 a week (or £433 a month) into stocks. After 25 years, I’d have £485,445. That’s assuming I achieve a return of 9% a year, which is the long-term average return of the stock market.

Year

Deposit (£433 x 12 months)

Interest

Total

1

£5,196

£219

£5,415

5

£5,196

£6,678

£32,658

10

£5,196

£31,831

£83,791

15

£5,196

£85,275

£163,849

20

£5,196

£185,275

£289,195

25

£5,196

£355, 545

£485,445

26

£5,196

£401,303

£536,399

We see here that after 25 years, an astonishing £355,545 of my gains would be from compound interest. Just one year later (year 26), that figure jumps above £400,000.

Collecting dividends

Dividend-paying stocks have played a critical role in Buffett’s success as an investor. He collects the dividends paid out from the earnings of the companies in his portfolio. This builds up a cash pile which he deploys when the market falls. Just like it did last year.

In fact, Buffet’s holding company Berkshire Hathaway spent almost $66bn on stocks in the first nine months of 2022. That was 13 times more than in 2021 when the US bull market was at its peak.

Which shares should I buy?

Firstly, I could research which stocks Buffett owns in his own portfolio. If I did that, I’d see that his largest holding is Apple. And that he’s a fan of financial stocks, especially Bank of America. Also, Coca-Cola and Chevron are large positions of his.

These companies are from a diverse range of sectors, but they all pay dividends. Of course, dividends aren’t guaranteed to be paid out. But this risk can be reduced by focusing on established companies with strong fundamentals.

The post How I’d invest like Warren Buffett in a Stocks and Shares ISA in 2023 appeared first on The Motley Fool UK.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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.

Motley Fool UK 2023