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Warren Buffett bought his first stock at the age of 11. Unfortunately, I didn’t start investing until later in life. But what difference would he have made if he had followed the advice of the great American investor, when he was much younger?
words of wisdom
I got my first job when I was 17 years old. I’m approaching 50 now, which means I could have been investing for 33 years.
That’s the first tip, start early.
Second, take a long-term approach.
Many of Buffett’s quotes emphasize the need to invest for the long term. “If you’re not thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.“he said on one occasion.
Buffett’s third piece of advice is to invest in a tracker fund. He believes that over an extended period, this will exceed the returns that a private investor will achieve.
As the name suggests, this investment product will track a particular index or group of stocks. This has the advantage of providing a diversified portfolio, without having to own all the stocks individually.
Some investors dislike these funds as they enjoy picking stocks and are excited to buy and sell. But if you don’t want to be actively involved in the day-to-day management of your investments, a tracker fund is ideal.
As an American, Buffett believes that the S&P 500 is the best index to follow. On this side of the Atlantic, the equivalent would be the FTSE 100.
Let’s break down the numbers…
A simple example may help to illustrate why Buffett is right.
My first job, every weekend at the local DIY store, paid me £1.50 an hour. Even with my modest salary, I’m sure I could have found £25 to invest each month.
According to I Gthe average annual growth rate of the FTSE 100 from 1984 to 2019 was 5.8%.
Buffett also believes in the reinvestment of dividends received. This is an effective way to supplement a regular investment. A reasonable estimate of the historical dividend yield, for the largest UK listed companies, would be 3.5%.
Based on these assumptions, after 33 years, you would now have almost £66,000. That’s not bad for a cash outlay of £11,400!
| Time scale (years) | Investment Value (£) |
| one | 329 |
| 2 | 688 |
| 3 | 1,082 |
| 4 | 1,513 |
| 5 | 1,986 |
| 10 | 5,112 |
| fifteen | 10,035 |
| twenty | 17,786 |
| 25 | 29,989 |
| 30 | 49,201 |
| 33 | 65,686 |
While this ignores the impact of inflation, brokers’ fees and stamp duty, it is a powerful illustration of the benefit that could be gained from sensible long-term retirement planning.
But Warren Buffett is 92 years old and still investing. If my table was extended for another 42 years it would show a closing value of over £665k!
Lesson learned
My example shows the power of compounding. By investing small amounts over a long period and reinvesting the dividends received, it is possible to build significant wealth.
Of course, there are no guarantees. The past is not necessarily a good guide to the future.
But I wish I had spent less time reading Shakespeare when I was studying for my A level in English literature and more time studying Buffett.
Maybe it’s time to put the teachings of the American investor in the school curriculum?
