No savings? Start building wealth the Warren Buffett way!

Investor Warren Buffett is a multi-billionaire now.

But it was not always that way. When Buffett first started investing, he was a schoolboy who saved money earned on his paper round to buy his first shares.

Buffett has learned (and earned) a lot since those first moves. Nowadays he would not have his portfolio concentrated in a single share, as he did after his first share purchase.

A lot of what he has learned, including such diversification, can be helpful when it comes to thinking about how to try and build stock market wealth from a standing start.

For example, some people think of shares as little more than prices. Buy at one price, sell at a higher price, and you make money. Or so their thinking goes.

To me, that is not investing but speculation.

Warren Buffett takes a more disciplined approach. He sticks to businesses he understands and feels he can assess. Even then, as he freely admits, he sometimes gets it wrong.

Buffett does not see a share as just a number. Instead, he sees it as a small stake in an enterprise. So, having assessed the business, he asks himself whether he would like to own it all.

If not, why would he want to buy even a small part of it?

If yes, he then looks at the share price to decide whether it seems attractive.

Sometimes, though, that price may not seem attractive, so he does not buy.

This is different to what a lot of investors do, especially new ones.

They look at a business they think has massive profit potential and decide to invest on that basis. However, that misses a crucial point: valuation.

Paying too much can mean that even a brilliant business makes for a terrible investment.

That is why Warren Buffett pays close attention to the valuation of a company before investing. As he says, “price is what you pay, value is what you get”.

Buffett (or at least his company Berkshire Hathaway) earns vast amounts of money thanks to share dividends.

So does he go out and paint the town red, popping champagne corks?

No. Instead, Warren Buffett puts the money back into further investing – a powerful technique known as compounding.

How powerful can this be?

As an example, one UK dividend share I think investors should consider is asset manager M&G (LSE: MNG).

It has a current dividend yield of 8.0%.

Compounding £1,000 at 8% annually for a decade, it would be worth £2,159. Compounding for 25 years, £6,848. For 50 years – I am a long-term investor – the £1,000 would compound to £46,602!

That is without dividend growth. M&G aims to grow its dividend per share annually.

Dividends are never guaranteed, though. In recent years, M&G has had a mixed record when it comes to attracting more funds from clients than they withdraw. That is a risk to profits.

Share prices can move around too. With a strong brand, large customer base, and highly cash-generative business model, the M&G share price has moved up 66% in five years. But share prices can fall as well as rise.

On balance, though, I think there is a lot to like here!

The post No savings? Start building wealth the Warren Buffett way! appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g 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.

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