The surging gold price may have encouraged many investors to buy the yellow metal in recent months. But this might not be the best way to become rich and retire early. Instead, it may be better to follow the advice of Warren Buffett.
Warren Buffett’s view on gold Buffett has always been against buying gold. According to the billionaire investor, buying it is a waste of money because it produces no cash. And most of the time, owners have to actually pay to store their gold.
As a result, all owners can do is sit tight and hope the price of gold keeps rising. On the other hand, companies produce cash, which supports their share prices.
That’s why Buffett likes owning stocks over precious metals like gold. He believes stocks are more likely to produce better returns over the long term. And so far, he’s been right. Stocks have substantially outperformed gold over the past few decades.
It seems unlikely this will change any time soon. Gold still doesn’t produce any cash flow. Meanwhile, high-quality stocks with large profit margins can produce lots of cash flow, which they can then return to investors.
Buying these businesses at low prices is the approach Buffett has followed for the past seven decades. And it’s helped him build a considerable fortune.
Focus on quality stocks Buffett’s favourite companies have a strong competitive advantage. Coca-Cola (NYSE:KO) is a great example. Coke is one of the most valuable brands in the world, recognised around the world.
This has helped the company go from strength to strength over the past few decades, helping earn Warren Buffett billions in the process. Indeed, the billionaire started buying shares in this business back in the 1980s, when its growth was only just getting started. He was able to purchase shares in the company at a discounted price, and he’s held on every since.
By focusing on high-quality businesses with a definite competitive advantage, Buffett has been able to sit back and watch his wealth grow.
These organisations are the perfect buy-and-forget investments because competitive advantages like strong brands are often hard to disrupt. That means these companies have the potential to earn large profits year after year and return lots of cash to investors in the process.
A diversified portfolio of these companies may yield market-beating returns over the long run.
The bottom line Overall, while gold might look like a good investment after its recent performance, investors who want to get rich and retire early may do better focusing on stocks instead.
By following Warren Buffett’s strategy of buying high-quality businesses at good prices and holding on for the long run, you may be able to build a sizable financial nest egg.
The post Forget gold! I’d follow Warren Buffett’s advice to get rich and retire early appeared first on The Motley Fool UK.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2020