As I approach 50, I am concerned that I do not have the necessary savings to enjoy a decent retirement. To see how I might be able to improve my circumstances, I have been reviewing the advice of Warren Buffett.
I have 18 years left before I am entitled to receive the state pension which, for a single person, is currently £185.15 per week. I need to supplement this with a reasonable level of savings.
Buffett, the 92-year-old investment guru, knows a thing or two about making money. After all, he is said to be worth close to $100bn. If he was in my position, I wonder what he would do to improve things.
Quality every time
One of Buffett’s most famous quotes is: “Price is what you pay. Value is what you get“. In other words, I need to focus on buying shares in quality companies, ideally when their stock prices have taken a bit of a battering.
There are a number of these in the FTSE 100 at the moment. With soaring commodity prices, rampant inflation, and rising interest rates, the economic outlook is currently very gloomy. This means the share prices of a number of high-quality companies are trading well below their 12-month highs.
Quality is clearly a key investment priority for the great man. He once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price“.
Buffett believes that a quality company is one that provides a good return on capital, has healthy and growing margins, demonstrates a competitive advantage, and is run by a capable management team. Therefore, if a company fails on any of these measures, I am not going to include its stock in my portfolio.
Buffett also advocates investing for the long term: “Our favourite holding period is forever“. With nearly 20 years to retirement, that suits me.
He also advises to “Never invest in a business you cannot understand“. If a company makes or does something clever or complicated, this does not necessarily make it a good investment.
Even further, he cautions against only considering investing in exciting companies or industries. Buffett warns: “Beware the investment activity that produces applause; the great moves are usually greeted by yawns“. I believe the Dotcom bubble proved this.
Buffett is a big fan of tracker funds. Over an extended period, he believes the returns are likely to be better than those obtained by an individual investor.
In support of this argument, analysis by IG found that £10,000 invested in the FTSE 100 in 1986 would have grown to £195,852 by the end of 2019. This assumes that all dividends received were re-invested.
If I could achieve a similar level of return, I would be very happy. I am therefore going to try and identify some low-cost tracker funds to add to my portfolio.
Over the next decade or so, by sticking to some of the basic investment principles advocated by Warren Buffett, I should be able to grow significantly my present level of savings.
Fortunately for me, Buffett also believes “You don’t need to be a rocket scientist” to make money from the stock market.
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Motley Fool UK 2022