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Over the course of several decades, legendary investor Warren Buffett has gone from a schoolboy buying stocks with his paper round earnings to a billionaire.
The reasons for his success are many, from his skill in capital allocation to his keen eye on risk management.
But a major reason Buffett was able to become wealthy from his stock market investments is because he reinvested the money he earned into buying more investments.
This is known as compounding. Not only has this worked well for Buffett, but it can help me build wealth as a small private investor as well.
compound dividend
As an example, take one of the shares owned by Buffett’s company. Berkshire Hathaway, it is diego is a London-based alcoholic beverages company that offers a dividend yield of 2.5%.
It has steadily increased its dividend annually for more than 30 years, underscoring the financial rewards to be reaped from Buffett’s approach of buying shares in high-quality businesses that can increase their profits because of some competitive advantage. .
If I invest £1,000 in Diageo today and reinvest the dividends received into more Diageo shares, after 29 years I will own £2,000 worth of shares. And that’s without putting in a single penny more.
With a higher yield quotient, the effects can be even more dramatic. take my stake M&G, which has an impressive yield of 10.3%. Adding dividends to that would mean that I could double my money in less than a decade.
These examples assume flat share prices and dividends. Of course, dividends are never guaranteed, but I think the point is still clear. Compounding can be a dramatic way to build wealth over the long term.
capital gains
But a lot of Buffett’s compounding doesn’t involve dividends.
Instead, they have chosen to keep the money in businesses that they have been rating highly for decades. If they have a strong enough business that they anticipate should be able to turn a profit, they can then go back into the business to make even more money in the future.
This may not seem as obvious an approach as the compound dividend. But it can be very powerful. Buffett bought his stake Apple more than a decade ago. Yet it is now worth more than five times the price he paid for it, even after excluding the dividends he received along the way.
invest like buffett
By following this simple approach of using my earnings from investing to buy more shares, I hope I can accelerate the long-term process of building wealth.
This could involve a combination of compounding dividends and investing any capital gains earned in my Stock and Share ISA into buying more shares.
This post Warren Buffett got rich doing it appeared first on The Motley Fool UK.
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Si Ruan holds positions in M&G plc. The Motley Fool UK recommends Apple, Diageo plc and M&G plc. The views expressed on the companies mentioned in this article are the author’s own and therefore may differ from the official recommendations made in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights can make us better investors.
Motley Fool UK 2023
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