Warren Buffett, the billionaire investor, enjoys the ‘game’ of investing. It’s been his life’s work, and he’s still at the head of Berkshire Hathaway at the age of 91.

As someone with no savings before the age of 30, building even a fraction of that wealth can seem like an impossible dream. But by paying attention to his method and employing some of his key virtues, I believe I can learn from Warren Buffett’s example.

Compounding interest

Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t, pays it.” 

Compound interest is when the value of an investment grows exponentially over time. For example, if a portfolio of £100 grows by 10% it is now worth £110. If that £110 then grows by a further 10% it is worth £121, then £133.1 and so on.

The stock market grows, on average, around 7% per year. At that rate, it would take 10 years for me to double any money invested. Not unreasonable at all. However, Buffett’s yearly letters to Berkshire Hathaway stockholders reveal that he has earned compounded annual gains of roughly 20% since 1964.

That’s doubling every four years! Annualised returns at that pace explain a lot about why he’s now a multi-billionaire.

Buffett focuses on fundamentals 

So how does Buffett get such high returns for himself and his shareholders?

In his 2021 shareholder letter, Buffett emphasised his focus on selecting high-quality enterprises. These are companies that can increase their profits year after year, have high free cash flow, low debt and a product or service that continues to sell well during bad economic times. It does not mean chasing trends or trying to get in on the new ‘hot’ stock option. Coca-Cola is a perfect example of this and is why it is one of his largest holdings.

So should I just buy what Buffett has? Not necessarily. Buffett takes a long time choosing shares, and even longer waiting to buy them. He tries to buy stocks when ‘great‘ businesses go ‘on sale‘ or trade below their intrinsic value. Then he holds onto his stock as the companies’ earnings multiply. Apple makes up a significant portion of Buffett’s portfolio but has shot up in value since he invested in 2016. There is a good chance will continue to grow, but I don’t want to be chasing trends. Instead, I need to look for companies that have solid fundamentals but haven’t had that explosive growth.

Long-term investing

To take full advantage of compound interest and a growing business, Buffett thinks long term. He only buys a stock if he knows he wants to hold it for years, even decades. To investors like myself, this is an even more important virtue. I don’t have the time or the resources to predict the movements of the stock market. Trying to make a ‘quick buck’ trading is only likely to lose me money.

The best, most consistent way anyone has profited from the stock market has been by investing in great companies and holding for the long term.

All investing has dangers, but without risk, there can be no reward. My strategy for generating wealth at 30, is to save as much as possible every month. Then, like Warren Buffett, carefully select companies for their income growth, stability and unique products, and hold them for years.

The post No savings at 30? I’m using the Warren Buffett method to build wealth appeared first on The Twelfth Magpie.

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James Reynolds has no position in any of the shares mentioned. 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.

The UK’s Warren Buffett?

Now, let’s be clear: in terms of investment returns and net worth, there’s only one Warren Buffett. Nevertheless, Ashworth-Lord might be considered the UK’s equivalent to the Sage of Omaha for two reasons.

First, the performance of his nine-year-old, £1.3bn CFP SDL UK Buffettology Fund has been superb. Since its inception, it’s been the top-performing fund in its sector, returning 229% by the end of May. The sector average over the same period was just under 60%. 

Second, the fund uses the strategy of Business Perspective Investing, just like Buffett and his tutor Ben Graham. In other words, Ashworth-Lord picks stocks as if he were buying whole companies.

Among the things he looks for are business models that are easy to understand and where earnings are fairly predictable. High returns on capital employed are a must, as is a strong balance sheet. Management must be frank with owners and not reliant on acquisitions to grow. 

While very much a buy-and-hold investor like Buffett, Ashworth-Lord isn’t afraid to sell if the investment case changes. Such are his concerns over the impact of the pandemic, the fund now has no exposure to retail and only one leisure-related holding (Dart Group). 

Speaking of the coronavirus…

What if markets crash again?

Ashworth-Lord’s strategy doesn’t really change, even in times of crisis. 

First, he only buys if the price feels right. Put simply, the Buffett-inspired investor looks for great companies trading at far less than they are really worth. This requires patience, something quite a lot of market participants struggle with.

Notwithstanding this, Ashworth-Lord also thinks market timing is very difficult, if not impossible. Indeed, he’s gone on record as saying he was surprised by just how quickly markets deteriorated in March, how draconian the lockdown was and how swift the recovery has been. The fact that this appears to be a “liquidity-fuelled market” (that is, based on money-printing by central banks) makes him wonder if we might have another downswing. 

As no one possesses a crystal ball, however, Ashworth-Lord believes investors need to accept that they’ll never get in at the absolute bottom and sell at the absolute top.

Instead, he suggests taking advantage of pound-cost averaging by buying frequently and averaging down. This is something we routinely advocate at Fool UK too, so long as we’re not talking about debt-ridden, low-growth companies. If the business is a likely survivor of the pandemic, this strategy makes perfect sense.

Last, the UK’s Warren Buffett is no fan of rebalancing a portfolio by taking money from winners and feeding it into losing stocks or new positions. If he buys, it’s using his existing cash pile.

Always keep some powder dry, would be Ashworth-Lord’s recommendation. The fact that markets sporadically tank isn’t the problem, it’s not having the capital to take advantage when they do that hurts. 

The post Fear another stock market crash? Try investing like the UK’s Warren Buffett appeared first on The Twelfth Magpie.

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Paul Summers owns shares in CFP SDL UK Buffettology Fund. 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.

Since Buffett began investing in the 1960s, he’s experienced a number of steep stock market declines, including the 1973/1974 crash, the ‘Black Monday’ crash in 1987, and the Global Financial Crisis (GFC) of 2008/2009. Yet he’s still managed to generate returns of over 2,000,000% for his investors. With that in mind, here are five gems from Buffett that I think are particularly relevant right now.

“Widespread fear is your friend as an investor because it serves up bargain purchases”

This quote is a great place to start in the current environment because investor fear levels have been off the charts recently. Indeed, the CBOE VIX index, which is often referred to as the ‘fear index’, has risen to a level not seen since the GFC. Buffett suggests we should use this fear to our advantage. As he says, fear serves up bargains.

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”

This quote refers to the fact that compelling buying opportunities (bear markets) don’t come around all that often. For example, the last time stock prices fell as much as they have recently was 2008. Buffett’s advice? Don’t be afraid to buy up big when stocks are super cheap. You don’t want to look back at this time as a missed opportunity.

“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table”

This is another top quote that is very relevant right now because there are a lot of great companies that appear to be in temporary trouble, due to the coronavirus.

Take alcoholic beverages champion Diageo, for example. This is a top-shelf company with a fantastic track record and a compelling future growth story. Yet its share price has tanked because, in the near term, it’s likely to see a hit to profits due to the coronavirus. This temporary setback could be an amazing buying opportunity for investors.

“We’re buying businesses to own for 20 or 30 years. We think the 20- and 30-year outlook is not changed by the coronavirus”

Buffett’s advice is to think long term-term, however, if you’re a buyer of shares in this market. Volatility could remain high for a while. So, if you buy a stock today, don’t worry about what it does tomorrow, next week, or next month. Instead, give yourself a long-term investment horizon, as he does.

“In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497”

Finally, this quote is a great summary of the type of shocks the stock market has to endure over time. Last century, stocks were impacted by all kinds of catastrophic events, all of which would have scared investors at the time. Yet the Dow Jones index still generated incredible long-term returns for investors. That’s certainly something to keep in mind right now, given the challenges we are currently facing.

The post 5 Warren Buffett quotes that could help you prosper in this stock market crash appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Diageo. The Motley Fool UK has recommended Diageo. 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.

Don’t despair if you found it tough. Here are a few recommendations for how to cope when Mr Market’s mood next sours.

Don’t panic

Learning not to panic-sell your holdings is hard, especially with 24/7 news coverage and photos of exasperated traders hunched over their terminals on Wall Street. We are, after all, programmed by evolution to follow the herd in times of apparent danger. Resisting this predisposition when cherished paper profits are getting smaller by the day is easier said than done.

But here’s the thing: nobody on this earth knows for certain which direction the market will head over the short term. Indeed, Friday’s rally, while not enough to erase the losses over the preceding few days, goes to show how quickly sentiment can reverse.

With this in mind, checking your portfolio every five minutes is nothing more than a recipe for stress. So, switch off physically and metaphorically and learn to see uncertainty as simply a part of investing. If this sounds too hard, it’s worth recalculating how much risk you’re prepared to take in the pursuit of growing your wealth and the amount of time you’re willing to stay invested.

Personally, the most I do in such a situation is check whether anything about the companies I’m holding has changed. If not, I stay invested and use the time that could have been spent worrying doing something more productive (or worrying about something else).

Remember that this is all normal

While plummeting markets can be difficult to endure, it’s vital to remember that they happen more often than you think.

As behavioural finance expert Daniel Crosby notes in his book The Laws of Wealth, the US stock market experienced 123 corrections (where stocks fall 10% in price) between 1900 and 2013. That’s more than one a year. Even more severe bear markets (where stocks fall 20%) happen every 3.5 years on average. 

When you understand the regularity of such events, not to mention their very limited ability to impact on a person’s ability to grow their wealth over the long term, it’s easier to take them in your stride. 

Keep a watchlist

So, we shouldn’t fear falling markets. Actually, we should learn to embrace them. Just ask Warren Buffett. 

The Sage of Omaha once remarked that only those who intend to sell in the near future should be happy to see the value of their holdings rise. Everyone else — those who intend to remain invested for at least the next five years — should rejoice when they fall since sinking share prices offer better value. Taking this advice on board, it’s always worth having a list of quality companies you’d buy if they suddenly went on sale.

Of course, it’s no use having a watchlist if you don’t have the cash to eventually pounce. That’s why keeping some powder dry is also recommended. Since interest on cash balances in stocks and shares accounts are often laughably low, this money could be retained in an easy access account elsewhere and then transferred across when needed.

The post How to survive the NEXT market meltdown appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. 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.

Another boon shared by many sin stocks is that their brands tend to foster loyal customers. Cigarette smokers are incredibly unlikely to switch brands, despite the bans on marketing in many countries, with only a 10% churn per year.

Combine these predictable habits with competitive advantages of scale, including buying power and hard-to-replicate distribution networks, and sin stocks like British American Tobacco (LSE: BATS) tend to achieve very nice returns on capital, one of Buffett’s favoured metrics. 

The company’s acquisition of Reynold’s American back in July makes financial sense because the sheer size of the newly formed behemoth makes it the largest tobacco company in the world, increasing the company’s already impressive economies of scale. 

Despite falling cigarette volumes, brokers are predicting a 13% increase in earnings this year, followed by a more muted 8% next. Of course, we shouldn’t rely on forecasts, but the company has proven its ability to increase earnings despite falling volumes. 

The company pays a 3.5% yield that I believe will remain well-covered by cash flow. Investors considering an investment in British American must be aware of the US FDA’s plans to reduce nicotine in cigarettes to non-addictive levels.

That won’t be easy. Robert West, professor of health psychology at University College London, said: “The idea of gradually reducing the addictive ingredient of cigarettes, nicotine, looks attractive on the surface. But unless nicotine is pretty much eliminated quickly and comprehensively in all available tobacco products – which seems unlikely – it runs a serious risk of making things worse as smokers smoke cigarettes harder in order to get the nicotine they need, leading to more exposure to the harmful tar.”

Therefore, I believe the FDA is more likely to encourage companies like British American to increase investment in alternative products like vaping technology, something the company is already invested in. 

Growth and Income

Micro Focus (LSE: MCRO) is about to integrate HPE Software in a deal that will turn it into a real behemoth of technology. But what does the company – and the soon-to-be-acquired HPE – do? The gist of it is they help “customers to link their investments in established technology with the latest innovation” by bridging the gap between old and new programming languages. This allows customers to make cost savings by getting more use out of outdated systems than would otherwise be possible. 

Recently, improved cash flow has been used to clear some of the company’s net debt ahead of the deal. This will, of course, place a greater burden on the balance sheet. Given management’s track record of improving margins at acquired businesses however, the deal looks good to me. 

Buffett is a big fan of companies that have high switching costs. Micro Focus’s solutions are embedded deeply in mission critical technologies and switching service providers could prove complicated and cause costly disruptions. 

The company’s shares have risen 200% in the last five years, but still only trade on a P/E of 20 and offer a 3% yield.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended Micro Focus. 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. 

Yet AIM also destroys more than its fair share of value due to its more relaxed regulatory structure. This makes it easier for smaller companies to gain funding, but also attracts shady characters from around the world. Take Globo plc , an out-and-out fraud that exploded spectacularly back in 2015 after admitting to  the “falsification of data and the misrepresentation of the company’s financial situation.” If that isn’t a shareholder’s worst nightmare, I’m not sure what is. 

Many investors give this ‘Jekyll and Hyde’ market a wide berth, a stance I can empathise with. That said, investors could quickly sidestep the majority of duds by learning a few simple rules of thumb. 

You don’t need to pass on opportunities like ASOS to keep your capital safe. Today I’ll outline three guidelines I believe are paramount to avoiding calamity in the AIM market. 

Remain sceptical of foreign companies

Investing in foreign companies is often a great idea due to the diversity it grants us, but the lax regulatory structure of AIM makes it a prime target for overseas fraudsters. Take, for example, recent accusations levelled at the now ex-CEO Oozi Cats of Israeli company Telit Communications (LSE: TCM). Apparently, he fled the US back in the early 90s after being caught committing wire fraud. The shares have dived 36% since the news broke earlier this month.   

Sometimes a foreign company has a decent reason to list on AIM, but if management isn’t forthcoming with a reason, I’d advise you to remain sceptical.

Avoid cash-consuming start-ups

If a company can’t turn a cash profit, I steer clear regardless of how incredible the business model or its supposed competitive advantages might be. Trust me, more often than not you absolutely can wait for a business to turn cash flow positive without missing out on incredible returns. If a business is truly a long-term champion, hanging on a year or two won’t destroy your savings. Cash-guzzlers will separate you from your money on a regular basis in my experience, completely outweighing the few successes you get into early. The income statement can be influenced by all sorts of accounting wizardry, but cash is harder to fake. 

Avoid IPOs, especially those paying chunky dividends. 

When a company first lists on AIM, its founders and management often dispose of huge chunks of the business. Investors must ask: “If the outlook is so wonderful, why are insiders selling?”

Furthermore, new floats have a limited financial history making it harder to gain a full understanding of operations.

Finally, a large dividend is often included to entice investors, but before you reach for that yield consider this: “Why is a growth company with supposedly wonderful reinvestment opportunities pumping cash back to shareholders?” 

There can be good answers to all of the questions posed above, but in my experience remaining sceptical of foreign AIM-listed companies, cash-hungry blue-sky concepts and fresh IPOs is a high-percentage approach to avoiding disasters. And in the game we stock-pickers play, avoiding huge losses is half the battle. 

The post Three AIM survival rules that could make you a millionaire appeared first on The Twelfth Magpie.

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• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Zach Coffell owns shares of Boohoo.Com. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. 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