Legendary investor Warren Buffett has some simple advice that can lead to rich rewards. Reviewing his collected wisdom, I’ve selected three simple tips that I am hoping will make it more likely that I can retire rich.
Long-term focus not short-term trading
It is possible to make money in the stock market by trading shares fast and benefitting from a run-up in value. It is also possible to lose money that way – and fast.
Buffett’s approach isn’t about spotting market inefficiencies and making fast trades. Instead, he looks for high-quality businesses selling at what he thinks are attractive prices. He then buys with the intention of holding the shares for a long time. As he says, in the short-term the market is a voting machine, but in the long-term it is a weighing machine. In any given year, shares Buffett holds like Apple and Coca-Cola, are unlikely to be the highest performing stocks in the market. But over time, their strong business results compound and can help to build incredible returns. Buffett has made close to $100bn investing in Apple.
That also means Warren Buffett doesn’t focus too much on market timing. He does seek to buy companies at a good price. But his philosophy is that a really great company should perform so well over decades that an investor can profit handsomely even if he doesn’t buy it at a particularly low price.
Warren Buffett sticks to what he knows
Buffett is a very intelligent and well-educated man. But he is laser-focussed on sticking to what he knows. That may seem unadventurous or at risk of missing out on great opportunities. Buffett doesn’t mind. He firmly believes that one can only assess opportunities properly with the right knowledge – and even then it can be difficult to make the right call.
A lot of people make the mistake of investing in something which they don’t understand. That may be because it has been recommended to them, because it seems to have strong momentum or is in a sizzling new industry. But that is speculation rather than investment.
The reason Buffett sticks firmly to investing in businesses he understands is because he wants to assess their likely future prospects. In the long term, for a share to grow in value on a sustained basis, the business usually needs to be able to provide attractive returns. It can be hard knowing how likely that is, but if, like Buffett, one stays within one’s circle of competence, it should be easier. Millions of investors lose money each year putting money into businesses they barely understand. Buffett didn’t get rich by being one of them.
Avoid excess
Buffett isn’t necessarily frugal, but he eschews what he sees as extravagant expense. That has helped him agree some successful business deals and avoid some stinkers in firms with excessive costs. It is also a principle with application to personal expenditure.
Buffett’s approach to living within one’s means may be unfashionable in an age of easy credit. But over the course of decades, it makes a big difference to how much one can save for retirement.