There aren’t many billionaires who share the secrets to how they built their wealth. But Warren Buffett might be one.
Buffett shares tips with anyone who’ll listen and thousands fork out many dollars to hear him speak in Omaha at the Berkshire Hathaway annual meeting.
It was at one of these meetings that he revealed a nugget of wisdom – his ‘million dollar’ rule – that could help anyone targeting a million.
I’ll share the rule in a second. But be warned, it’s a bit ‘out there’.
Track record
In fact, anyone else but Buffett might be laughed off after such an outrageous statement, but he has the track record to back it up.
His company Berkshire Hathaway has returned around 20% a year for decades. Compare that with 10% for the S&P 500 or 7% with the FTSE 100.
A glowing recommendation for Buffett?
Yes, but the difference is even greater than it seems. A £1,000 stake over 30 years turns into £7,612 from the FTSE 100, £17,449 from the S&P 500, and £237,376 from Berkshire Hathaway.
He’s beating the American index by 13 to one. He’s beating the Footsie by 31 to one! Simply, when Buffett speaks about investing, it’s worth paying attention. So what is this rule, then?
Well, Buffett argues that if he was handling a sum of less than one million dollars then he could grow it 50% each year.
That’s quite a statement, turning £1,000 into £1,500 in a year or turning it into about £60,000 in a decade.
Small sums
It works because such a “small” sum of money makes it easier to find stunning returns – if you know where to look. In other words, there’s more chances to beat the market when investing smaller sums.
What kind of firms might he buy?
Well, working with smaller numbers opens up smaller companies like those on the FTSE 250 and one UK stock he might like the look of is Games Workshop (LSE: GAW).
This FTSE 250 firm owns the intellectual property for Warhammer 40k and other fantasy worlds. This creates an economic moat against rivals.
People love their products and this has resulted in revenue and earnings steadily climbing for decades. The firm’s low debt and a decent pile of cash offer a margin of safety too – another thing Buffett looks for.
Active investing
The shares are on the pricy side, trading at 23 times earnings. Buffett is known for taking a look at the value of the price on top of the quality of the business.
But on the whole, I think Games Workshop is an example of the type of company Buffett would look for.
And while I don’t think I’ll be hitting the 50% returns Buffett claims, I hope that investing actively will give me more chances to grow wealth.
The post Here’s Warren Buffett’s most outrageous investing secret appeared first on The Motley Fool UK.
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More reading
How I’d invest my first £20k ISA to target £4,536 a year from dividend shares
Warren Buffett returns 20% a year. Can I do the same?
This FTSE 250 stock’s better value than it looks
I’d buy this passive income stock for my ISA that pays out £4.20 per share
My simple £10-a-day passive income plan
John Fieldsend has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Games Workshop Group Plc. 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.
