When I was in my late teens, I opened a Cash ISA. I thought it would be a good way to save and get me on the train towards becoming a millionaire one day. Interest rates were higher back then, but looking back there were so many better ways I could have put my money to work. Legendary investor Warren Buffett bought his first share at a younger age than I opened a Cash ISA, and still lives by the same advice he gives out. Using some of his tips over the years can help all of us become better (and more profitable) investors going forward.
Timeframes
One piece of advice from Warren Buffett that has always stuck with me is his comment regarding Berkshire Hathaway (his listed investment firm). He said that “our favourite holding period is forever”. This may sound strange, but Buffett’s advice is basically guiding investors to having a long-term outlook when buying stocks.
The reason for this can be seen from my example of a Cash ISA. To keep the maths easy, let’s say you can invest at a rate of 1%. £1,000 turns into £1,010 at the end of the year. Holding this for a long period will build up your pot, but you’re never going to make it to a million! On the other hand, investing these funds into FTSE 100 growth stocks could yield up to 10% profit a year. When you compound this growth rate over a period of a decade or more, it really starts to make a difference. So as an investor wanting to achieve good profits, I think I’m much better off buying good quality stocks over other alternatives.
Attitude
Buffett offered further advice when he commented that “an investor should act as though he had a lifetime decision card with just twenty punches on it.” Buffett here was trying to advocate being very selective in our investing approach, as if we could only buy 20 companies in our entire life. If that was the case, we’d be very careful about choosing which stock to buy and hold.
Picking the right company and holding it for the long term can yield rich results. For example, take the JD Sports Fashion share price. If I’d invested £1,000 into the stock eight years ago, it would be worth over £20,000. I wrote more about this in a piece you can read here. Warren Buffett’s advice rings true in the case of JD Sports, and it isn’t an isolated example.
Learning from Warren Buffett’s advice
The above examples using £1,000 investments won’t get me to a million any time soon. But it’s just to highlight how sound the advice that Buffett has offered really is. In order to speed up the process to make a million, I just need to increase the amounts invested. Instead of a lump sum of £1,000, it’s much better to try and invest £1,000 every month. The strategy is sound, and if growth stocks do return 10% on average per year, I’d have a pot worth a million after 25 years.