Image source: The Motley Fool
There are many reasons why billionaire investor Warren Buffett has done so well.
He invested in big companies. He has been active in times when the market was largely neglected. He had access to other people's capital from the beginning of his long career.
But one simple move, which I can copy in my investing, undoubtedly made the Sage of Omaha billions.
Double down on success
That movement is known as consolidation.
In other words, when Warren Buffett earns sweet dividends for the share he owns, he does not throw them into the race, or pay dividends to the shareholders of his company. Instead, he replants them.
Buffett has even said, “my life has been a product of compound interest“.
Her late partner Charlie Munger was a big fan. He said, “The basic equation of compound interest is one of the most important models in the world“.
How compounding helps build wealth
Do you remember as a child trying to fold a piece of paper, then folding it over and over again, only to find out about seven times that it wouldn't fold again?
The reason was that you were too thick. Concatenation works in the same way – but without the necessary ending.
It is much more difficult to buy a share that doubles in value than it is to double the length of a piece of paper by folding it. But imagine that I can increase the value of my portfolio by 10% per year.
After one year, each £100 will be worth £110. But next year, 10% will mean an increase of £11. Next year, it will be 10% of £121: £12.10. Notice that extra money itself gets more money? That is the essence of integration.
Warren Buffett has been investing for almost 83 years. If I put £100 into my Stock and Shares ISA at 10% for 83 years, without making any new investments, the ISA will be worth it. £388,783! Yes, you read that right.
Finding stocks that produce good returns
In some ways, it's actually easier for me as a small private investor to find stocks that generate higher returns than Buffett's. His portfolio is so vast that a few investments can really move the needle.
One that exists in recent years an apple (NASDAQ: AAPL). Buffett has been selling the stock by the bucketload in recent months — but it's still an important part of his portfolio.
Let me use Apple to illustrate some of the factors I would look for when hunting for a stock that I hope can grow at a long-term compound growth rate of 10% per year (the tech giant is up 274% over the past five years, even without considering dividends).
It has a large, strong target market. Apple has competitive advantages that provide what Warren Buffett calls “the canal”, from a strong brand to a unique ecosystem of products and services.
The main risk is low-cost competition and Apple's revenue declined last year. But I still think it's a good business. I have no plans to buy its shares simply because I think its price-to-earnings ratio of 35 is too high.
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