Famous investor Warren Buffett may be super-rich but he was not born into amazing wealth. Although his family was deemed well off, Buffett’s billions have come about as a result of his own investing success.
But If I had no savings and wanted to start building my wealth, here is how I would try to do so by learning from the ‘Sage of Omaha’.
Growing wealth
Money obviously does not grow on trees and to buy shares I would need funds. That is why I would set myself a regular saving target, for example £100 a week. I would set a goal that I felt was achievable, but challenging. Basically, the more money I save, the quicker I could start buying shares to try and build my wealth.
One reason Buffett has been such a successful investor is because he avoids a trap that catches many people. As their funds are limited, they put their money into very risky companies in the hope of fast returns. I can see why that seems tempting.
But I would take my time researching and try to invest in quality companies for the long term. As Buffett said: “The first rule of an investment is don’t lose money. And the second rule of an investment is don’t forget the first rule.”
That sounds obvious, but many people forget the first rule because they are in a rush. All shares carry risks, but Buffett focuses on what he sees as well-run companies with sustainable competitive advantages.
Understanding growth drivers
There are two broad types of investing. So-called growth investing typically involves buying shares in companies that are developing a new product, service or customer base in the hope of future growth. Companies like Tesla and Ilika are examples of growth shares.
Another style of investing focusses on the potential dividend from what are known as income shares. National Grid or British American Tobacco are examples — both pay dividends.
If my objective was to build wealth over the long term, I think either approach could possibly work. I may try to identify companies I thought had good business growth prospects. Alternatively, I could hope to get chunky dividends and grow my wealth through compounding them. I might use both approaches at once.
Whatever I decided to do though, I think it would be important to focus on finding shares I thought had some way to help me grow my wealth. That might be promising business growth prospects that could lift the share price, or the potential to throw off large sums of cash I could receive as dividends.
Buffett’s infrequent action
One surprising reason Buffett has been such a successful investor is because he does not buy or sell shares frequently. He waits until what he thinks is a really great potential investment — and then invests a sizeable amount.
Buffett keeps his portfolio diversified across a range of shares to help manage his risk and I would do the same. But, like him, I would not rush to invest. Instead, I would take time, do research and wait until I found what I thought were companies with great potential trading at an attractive share price.