Legendary investor Warren Buffett isn’t keen to retire – he’s still working hard in his nineties. That is ironic, as his investing skills have earned him funds many people contemplating retirement would envy. The good news is that even if Warren Buffett isn’t keen to retire from his day job at Berkshire Hathaway, I could follow his tips to improve my own chances of retiring rich. Here are three of them I’d apply.
1. Do less, not more
One belief many people have is that the more they do, the more likely they are to retire rich. That may hold true when it comes to work, though maybe not. But Warren Buffett doesn’t reckon it holds true when it comes to investment. He is an advocate not of activity, but of relative inactivity.
By trying to spot every little opportunity that comes our way, Buffett reckons, we can miss the big picture. We also increase our risk taking and may not have dry powder when a genuinely big investment opportunity comes along. Buffett reckons that all investors encounter a few great opportunities in their lifetime. He advocates waiting years or decades for them if necessary, but when they come committing to them in a big way. As Buffett says, “you(‘ve) really got to grab them when they come. Because you’re not going to get 500 great opportunities.”
To discipline the mind, Buffett suggests imagining that one had a punch card with twenty spots, and one had to be punched out whenever one made an investment trade. Doing that would bring a lot more discipline and help people build retirement plans based not merely on good opportunities, but only on what they perceived as great opportunities.
2. Focus on capital retention
Another surprising lesson from Warren Buffett sounds implausible because at first it seems so obvious. As he says, “Rule number 1: never lose money. Rule number 2: don’t forget rule number 1.” That truism actually contains powerful wisdom. Almost all investors lose money sometimes, including Warren Buffett himself. But it’s the second rule which matters here. Buffett is saying that, in order to chase attractive seeming opportunities, it can be easy to lose sight of the importance of capital preservation.
That could include bending one’s own risk management rules, speculating rather than investing, focussing on possible return not likelihood of loss, or any of a plethora of other habits common to millions of investors. Buffett sees that as a massive mistake – and he’s richer than any retiree in the UK, so I think he knows what he’s talking about.
Tempting though it may be, instead of zooming in on the best looking opportunities, Buffett cautions us always to focus just as much on how risky any investment may be.
3. Warren Buffett on knowledge
The third lesson from Warren Buffett is always to focus on one’s circle of competence when investing. No matter how tempting shares may seem, if they are in an industry he doesn’t understand he simply won’t buy them.
One can expand one’s circle of competence, by learning new things. But focussing on what one knows seems like a sensible approach to me when it comes to improving the chances of rich investment returns.