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Here’s one of the secrets of Warren Buffett’s success and how you can have it too

Kevin Godbold
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US-based billionaire investor Warren Buffett is well known for buying shares linked to high-quality businesses and then holding them for the long term.

In his 2018 report to the shareholders of Berkshire Hathaway – the conglomerate he controls — he refers to his shareholdings as “an assembly of companies that we partly own.”

And he owns them because, when equally weighted and averaged, they are earning around 20% annually on their net tangible equity capital, and doing so “without employing excessive levels of debt.”

In for the long haul

Great businesses like that are hard to find, so Buffett won’t let the opinions of Wall Street analysts, the actions of the Federal Reserve, political developments, or forecasts by economists shake him out of the stocks. In other words, he ignores everyone and everything except what’s going on in the businesses he part-owns.

He tries not to pay too much money for a stock and reckons that “over time, investment performance converges with business performance.” But he also thinks investing in businesses in America gives him a powerful tailwind.

Astonishing returns from America

Buffett made his first investment in the stock market in 1942. But if he’d been able to put his money in an S&P 500 index tracker fund with no fees back then, and reinvested all the dividends along the way, he reckons he would have seen a gain of around 528,711% by January 2019. That kind of return would have turned a $200 investment into just over $1m.

The S&P 500 has achieved an annualised return over the period of 11.8%, and I find it astonishing just how large a sum that can compound into over time. But if a 1% annual fee had been paid to fund managers and others along the way, reducing the annualised return to 10.8%, the final sum would have been around half, at $0.5m or so.

Indeed, little differences in the annualised returns we compound make big differences to our eventual pot of money in the long run.

How to get involved

Meanwhile, despite his share-picking prowess, Buffett reckons much of his investing success is down to what he calls ‘The American Tailwind’, athough he does acknowledge that other countries have bright prospects as well. And I reckon the UK is one of those dynamic countries worth a closer look.

It’s easy to get involved in the stock markets of the world these days by investing in low-cost, passive index tracker funds, such as those following the fortunes of the S&P 500 or the FTSE 250, or many others. 

And if you choose the accumulation version of the tracker fund, the dividends will automatically be reinvested for you, giving you a shot at compounding the kinds of returns Buffett worked out the S&P 500 delivered over his investing lifetime.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short January 2020 $220 calls on Berkshire Hathaway (B shares). 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 2019