Image source: The Motley Fool
Billionaire investor Warren Buffett's name is mentioned a lot. But with a huge fortune under his belt, can the legendary stock picker really offer much inspiration to a private investor of much, much more modest means?
I think so. Even with just £1,000 to invest, here are some lessons I think a smart investor could learn from the 'Sage of Omaha'.
Detecting great opportunities
Good opportunities in the stock market are not necessarily as rare as people think. But the big ones appear only from time to time. In fact, Buffett has attributed most of his success to one notable investment every five years or so.
Whether it's £1,000 or £1 million, the benefit of being able to spot and take advantage of great opportunities – a combination of a brilliant business with an attractive share price – can help produce strong returns.
Over time, even from a fairly modest financial base, that can add up. Growing £1,000 at a compound annual rate of 19% (close to what Buffett has achieved over time with a book value per share of Berkshire Hathaway) over 50 years would result in a portfolio valued at just under £6m.
See time as a servant, not a master
Once he owns a stock, does Buffett wait for the next good news and sell it within weeks or months for quick money?
No. Buffett is the very archetype of the long-term investor.
Their approach is to buy stocks with the intention of holding them for years, or even decades.
Your participation in Coca-cola (LSE: KO) is a good example of this approach in practice. The company operates in a market that is likely to experience high customer demand in the long term. Yes, sugary soft drinks are becoming less popular and that's a risk to Coca-Cola's profits. But the company has been continually updating its product portfolio to keep up with evolving consumer tastes.
By generating long-term demand, thanks to proprietary formulations and unique brands, the beverage company has been able to strengthen its customer loyalty. That gives it pricing power, which, in turn, has allowed it to increase its dividend per share annually for more than half a century.
That set of characteristics has meant Coca-Cola's share price has soared over the decades that Buffett has owned it. Not only that, but the dividend growth means Buffett now makes back more than half of your original investment each year only in dividends.
By making large investments and then letting time take its course, even a modest investment can potentially offer excellent returns.
Stick to what you know
Another surprising aspect of Coca-Cola, as with many of Buffett's investments, is that when he bought it it was not a little-known company with difficult-to-understand technology.
It was a well-established and proven business that was widely known. In fact, that helps explain its appeal to Buffett. He has repeatedly discussed why he likes to stay within his “circle of competence”when investing. I see it as a useful lesson for any investor.
