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Since he took control of the investment company Berkshire Hathaway In 1965, Warren Buffett achieved an average annual return of 20%.
That is awesome. If I make 20% a year, I’m happy. But 20% per year could provide a very good income.
The big question, however, is how do you do it? Oh, and if he can do it, can we learn to do something similar ourselves?
Buffett has his famous number one rule, but I’ll leave it for a moment.
Quality counts
Before that, the key part of Buffett’s strategy is to buy good quality companies when he believes the stock is trading below its intrinsic value.
You’re not looking for the next big thing or looking for risky growth opportunities. Or think about multibaggers and how to get rich quick. No, just buy quality and last a long time.
Buffett sums up his ideal stock purchase by saying: “It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price.“.
Defensive actions
Buffett also looks for companies with good defensive positions.
He once said: “If you gave me $100 billion and said take away Coca-Cola’s global leadership in soft drinks, I would give it back and tell you it can’t be done.“.
However, he invested a lot in Coca Cola stocks, and he has done very well with them.
UK security
Which UK stocks could have defensive moats?
I would think of National Network here, with its monopoly on energy distribution. And big pharmaceutical companies like GSK having such huge capital invested that it would be very difficult for newcomers to enter.
I’m sure others can think of more.
What you know
Another thing that catches my attention about Coca-Cola besides its defensive qualities. It’s easy to understand. It makes popular soft drinks and sells them.
Sure, the company excels at marketing and all kinds of other things. But the business itself is not complex.
And that’s another key rule: buy what you know.
Hard to understand?
Are you thinking of something new in high technology that everyone will be excited about? Do we understand your technology enough to evaluate the likely profitability?
If not, it might be one to pass. That’s why I’d probably avoid, say, any new artificial intelligence (ai) stocks. I don’t know anything at all about technology.
Returns
I believe following these approaches gives me the best chance of retiring with a decent passive income stream.
Now, I’m sure I won’t match that 20% per year, or even come close.
But, during the last 20 years, the FTSE 100 averaged 6.9% annually. I think that should be enough to generate a decent income fund in the long term.
And, who knows, if I’m lucky, I might even achieve the stocks and Shares ISA’s 9.6% average annual return of the last decade.
Rule number 1
Oh, I’m near the end and I still haven’t gotten to Warren Buffett’s rule number one. It is simply “Never lose money.” If we follow the rest of his long-term approach, I think we can greatly reduce the chances of that happening.
