In the video below, billionaire investor Warren Buffett explains how to turn $40 into $5 million.
Buffet explains that in 1919 when Coca Cola first went public, a single share of the stock sold for $40. He further explains that one year later the stock had dropped 50%. With events in the future that were damaging to the business, including sugar rationing, World War II and other problems, an investor might have expected shares in the business to drop from there. However, Buffett explains that that one $40 share of Coca Cola would be worth about $5 million today.
Buffett concludes that if an investor is right about a business being good, it’ll override almost any other factor. The investment guru goes on to say that being right about the business itself being solid is more important than knowing when the stock will take off.
Buffett says his biggest investing mistakes came when he knew a business or industry was a solid investment and he didn’t buy the stock. For instance when the Clinton healthcare system was proposed, Buffett said he knew he could make a ton of money on healthcare stocks but didn’t. He also should have made a lot of money on Fannie Mae in the mid 80’s because he understood the industry but he didn’t make the move.
Other Investments That Soared
Investments in some other kinds of stocks would have seen similar gains. $10,000 invested in Microsoft back in 1986 when it first went public would be worth almost $5 million today. $10,000 invested in Apple stock in 1980 would be worth over $300,000 today. $10,000 invested in GAP in 1978 would be worth nearly $5 million today.
Of course for every success story there are ten failures. Investments of $10,000 in dozens of tech firms in the 80’s would now be worth nothing. So how can an investor boost the chances their investments will grow?
Good Companies Make Good Investments
Buffett says the way to know if a company’s stock is worth buying is to know if the company is “good.” But how do you know that? Some financial advisers recommend looking at financial metrics like the company’s earnings, earnings growth and earnings stability. Others recommend visiting the business itself and seeing if the employees are happy and the parking lot is full. Still others counsel investors to think about the industry and the popularity of the product or service the company provides.
According to Buffett it all comes down to information. The investor who knows the most about a business is the one most qualified to say whether the stock is a good buy.
Related: How to Start Saving for Retirement the Easy Way
Additional Source: The Financial Characteristics of a Successful Company – Investopedia