Image source: The Motley Fool
As time goes on, plans can sometimes move forward into the future. Many of us hope to build long-term wealth, for example, but as life presents unexpected financial challenges, even setting aside regular savings can be a challenge. I take some lessons from billionaire investor Warren Buffett when it comes to trying to build serious wealth.
The important lesson from the 'Sage of Omaha' is that what matters is not what you start with, but what you do with it.
He came from a well-to-do but not rich family. By riding his bicycle before school each day and delivering newspapers, Buffett was able to earn pocket money and began buying stocks for the first time.
His approach has remained the same ever since – continue to earn money and put it back into new investment opportunities, aiming to increase the size of his wealth along the way.
Like pushing a snowball down a mountain
Buffett's style of investing is sometimes called “snow“.
As it pushes the snowball down the hill, it can pick up more snow as it goes, and it picks up more snow. So a snowball can be much bigger at the bottom of a hill than it was at the top even if there is no effort.
Investors simply need to pick the right hill and let time and momentum work their magic.
Money can snowball too
I admit I've never done that in real life with a snowball. But the metaphor makes perfect sense to me.
I think the stock market can show an effect on performance, as Buffett has shown time and time again. For example, British American cigars (LSE: BATS) currently offers a yield of 8.8%. So if I invest £1,000 today I can expect to receive dividends of £88 a year. If I use them, after ten years my stake will still be £1,000, assuming no change in share price.
But if I simply reinvested those gains along the way – freezing or, as we call it, compounding – then after 10 years I should own British American shares worth more than £2,400.
I could go on and on for decades. Buffett did just that, holding many stocks for many years and using their profits to invest in other businesses.
Building wealth, one step at a time
In practice, things may not work out so well. Take my assignment at British American for example. Tobacco use is declining in many markets, which is an obvious threat to profits.
Non-tobacco products are a driver of growth but are not yet profitable. However, British American is a proven money generator on a large scale. It has raised its dividend per share every year for decades, making it a Dividend Aristocrat like Coca-Colathe long-time Buffett in charge.
Like many of the stocks Buffett owns, it also benefits from strong brands and competitive advantages (what he calls moats) like a large distribution network.
By investing consistently in a diverse range of stocks and compounding my dividends or capital gains like Buffett, I hope to build long-term wealth.
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