Getting rich is a dream shared by many, but only achieved by a few, such as Warren Buffett. Today, the Oracle of Omaha is worth $85.6bn – quite a bit more than the million many of us aim for. However, he first gained his millionaire status around the age of 30, despite only having around $6,000 15 years before. So how did he do it?
How Warren Buffett turned $6k into $86bn
Warren Buffett’s secret formula for building wealth is not actually a secret. He buys shares in high-quality businesses and holds them for years — sometimes even decades. For example, he initially started buying shares in Coca-Cola in 1988 and has never sold any of them. Some 33 years later, the stock price has risen by nearly 17 times and is now the third-largest holding within the Berkshire Hathaway portfolio.
This approach is what made Warren Buffett one of the world’s most famous, and to some, the most successful investor today.
How does Warren Buffett find high-quality businesses?
While buying and holding cheap shares forever is how Warren Buffett got rich, it’s not as simple as it sounds. Remember, when you buy shares, you are purchasing a portion of a company — the more valuable the company, the more valuable the shares.
Identifying a valuable business is the key to becoming a successful stock picker. But how do you know whether a business has value?
One way is to look for competitive advantages over rival firms. Going back to Coca-Cola, Buffett discovered its popularity over other soft drinks by counting discarded bottle caps. The beverage producer was and still is, generating enormous customer loyalty through its brand. Today, the name Coca-Cola is known worldwide, with over 1.9 billion servings sold each day.
Buying cheap shares can make you a millionaire
Owning a high-quality business won’t make you rich if you paid too much for it. Over the short term, stock prices are primarily driven by irrational human behaviour. This is why daily price movements appear random and unpredictable. However, over the long term, stock prices eventually reflect the underlying value of the business. That’s why Warren Buffett buys and holds stocks for a long time.
But the short-term volatility does create some opportunities for investors to buy shares in a high-quality business at a cheap price. For example, in early 2020, the UK stock market plummeted due to the fears surrounding Covid-19. One stock from my portfolio, Oxford Biomedica (LSE: OXB), saw its share price drop by 40% since the start of the year. The biotech firm assists large pharmaceutical companies in developing gene and cell-based therapies. It is also heavily involved with AstraZeneca’s Covid-19 Vaccine. The pandemic’s effect on everyday operations was minimal, so while many investors were selling out of fear, I was busy buying more shares.
If an investor had bought the shares in March, they would be enjoying a return of over 150% in just nine months!
The bottom line
The pandemic has created many opportunities to buy high-quality businesses like Oxford Biomedica at a cheap price. Even now, there are still many stocks within the FTSE 250 trading below pre-pandemic levels.
With so many companies being undervalued by the market, I think now could be one of the best opportunities to start down the road to becoming a millionaire just like Warren Buffett did over 70 years ago.
The post Want to be a millionaire? I’d follow Warren Buffett’s example and buy cheap shares appeared first on The Motley Fool UK.
Zaven Boyrazian owns shares in Oxford Biomedica. The Motley Fool UK has no position in any of the shares mentioned. 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 2021