Image source: The Motley Fool
It's easy to look at billionaire Warren Buffett and find ways in which he seems different than most of us. However, the reality is that Buffett started with no savings or stocks. He saved money from a newspaper sale when he was a student to make his first moves in the stock market. The rest, as they say, is history, and a tremendously lucrative history!
If I had no savings and wanted to achieve greater wealth, here's how I would apply Warren Buffett's method to my efforts.
Understanding what investing is
Many people consider investing to be speculation. They buy shares of companies they don't understand well in the hope that they will rise in price.
Buffett's approach is different. He considers a stock to be a small stake in a company (and it is). Therefore, he looks for companies that he considers excellent with attractive prices and then buys their shares with the intention of holding them for the long term.
By focusing on areas he understands, Buffett is more likely to know what he's getting into. That said, even the best companies can run into unforeseen difficulties, so he always diversifies his portfolio across more than a couple of companies.
Purchase and possession
That approach can make money in two different ways (although it may not: stock prices can go up or down).
One of them is the increase in share price. Buffett's involvement in Coca Cola (NYSE: KO) illustrates this point. He spent a few years building up a stake in the soft drink maker, with the last purchase being made 30 years ago (Buffett really is a long-term investor!).
As he said in this year's letter to his company's shareholders. Berkshire Hathawayhis investments in Coca-Cola and American Express “They are significant assets and also illustrate our thought processes..”
His Coca-Cola shares were worth $1.3 billion. They are now worth $25.6 billion. Both figures are large: few people can afford to spend $1.3 billion on shares! But the key point is the price. growth of 1.969%. If I had bought at the same time as Buffett, even on a much smaller scale, and held onto my investment until now, I would have also seen the same increase in stock price.
This demonstrates the potential benefit of purchasing shares of a company with a competitive advantage in a market with continued strong demand, when its shares are for sale at an attractive price.
dividend machine
But what about the second way Buffett has made money (and lots of it!) from his investment in Coca-Cola?
Dividends are never guaranteed. But Coca-Cola pays them regularly. In fact, it has increased its dividend per share annually for more than 60 years. This year, it will pay shareholders, including Buffett, $8.4 billion in dividends.
The $1.3 billion investment now earns him over $700 million in Coca-Cola dividends a year. This is completely passive income – all he needs to do is hold on to the shares he already owns!
Finding great companies to buy
Coca-Cola is big business but, like all companies, it faces risks ranging from waning consumer enthusiasm for sugary drinks to high energy costs that make production more expensive.
Buffett hasn't bought Coca-Cola shares in 30 years. But I am applying his method. now Trying to find cheap stocks to buy!
