Image source: The Motley Fool
Warren Buffett’s approach to investing is what put him on many investors’ radars. Although he started with a relatively small sum, the “Oracle of Omaha” has built a multi-billion dollar fortune by investing in high quality companies at bargain prices.
Despite its simplicity, this strategy is how he averaged a whopping 20.1% annual return. And copying his method could be the key to building a big nest egg, even from the age of 50.
While the stock market is going through some turmoil right now, many stocks seem to be offering exceptional value at low prices. In my opinion, now is potentially the perfect time to start the wealth building process.
Warren Buffett’s long-term strategy
For Buffett’s strategy to work, it takes patience. Becoming a long-term investor means operating with a time horizon of at least 5 to 10 years. Why? Because the use of this approach is not to buy tickers but rather to invest in companies. And businesses need time to realize their full potential, which never happens overnight.
Obviously, investors starting out in their 50s don’t have as much time to establish a nest egg as someone just entering the workforce. But since most people retire around age 65, there are still 15 years to harness the power of compounding – more than enough to deploy Buffett’s strategy.
Buy high quality undervalued stocks
Buying and holding old inventory will not suffice. In fact, without proper research and due diligence, the odds are that buying stock in a company indiscriminately will destroy wealth, not create it.
Wealth in the stock market is built through a combination of growth and value. And it’s the companies that can offer both that often end up winning.
These are companies with:
- Strong financial positions to weather short-term disruptions
- Proven products or services that are growing in demand
- A set of competitive advantages that prevent rivals from stealing customers
But investing in high quality stocks at any price can also end in disaster. It is entirely possible to come across an amazing company that is a terrible stock. Buffett is not only looking for wonderful companies to buy, but also for the best price.
Fortunately, finding undervalued investment opportunities in 2022 just got a whole lot easier, thanks to the stock market correction.
Build a nest egg
Replicating Buffett’s returns is obviously easier said than done. But even if an investor can only match the stock market’s average 10% annual return, that’s still enough to make a decent nest egg.
In fact, investing £1,000 per month with a 10% return for 15 years will build a portfolio worth around £414,470. Withdrawing 4% of it every year turns into a passive income of £16,578 a year.
This figure is calculated assuming that the stock market does not decide to throw another tantrum. In reality, another crash or correction is likely to occur at some point in the future, which could significantly delay the wealth building process. But this calculation demonstrates the potential returns an investor can achieve by following Buffett’s investment strategy.