Warren Buffett has been investing for almost his whole lifetime. But many people do not start buying shares anywhere near as early as he did. Even if I had no savings at 30 though, I would use some elements of the Buffett method to help build my wealth. Here are four practical tools from the ‘Sage of Omaha’ that I would use to begin investing.
Focus on loss avoidance not potential gain
According to Buffett, the first rule is not to lose money – and the second rule is never to forget the first rule.
In practice however, investors often lose money on some deals. Buffett has suffered big losses on occasion. But his mindset is a useful reminder that there is no point making gains on some investments if they all get wiped out by other poor choices.
If I was a new investor, the practical way I would apply that mindset is by focussing not only on the potential upside from a particular share, but also the possible downside. I would try to build my portfolio by buying shares I felt carried a low level of risk.
Buy great businesses
A look at Buffett’s portfolio reveals a plethora of household names, such as Apple and Coca-Cola. That is because Buffett does not typically hunt around in neglected corners of the stock market to find hidden bargains among largely unknown companies. Instead, he focusses on finding large, great businesses with a proven business model and ability to make profit. I would do the same.
Warren Buffett on asset allocation
Buffett sees his main role as allocating the assets of his company Berkshire Hathaway. When doing do, he diversifies across multiple businesses to limit the impact on his portfolio if one performs poorly.
But Buffett does not invest in hundreds of different shares. Instead, at any time, he judges an investment idea against what he considers to be his number one idea at that time. If he thinks it is less attractive, he will usually not invest. He could just put more money into what he sees as the better idea, after all.
Diversification is an important risk management tool and, like Buffett, I hold a diversified portfolio of shares. But I also think the simple test of judging any potential shareholding against what I see as my current best investment idea can be a helpful tool for making decisions.
Lose no sleep
No share is worth losing a single night’s sleep over, according to Buffett. I think that is good advice, especially for a new investor who may lack personal experience of stock market volatility.
If a share would cause me to lose sleep because it is so risky, or has too big a position in my overall portfolio, I am not investing prudently. Again, I think Buffett’s rule of thumb can help me become a better, more rational and less emotional investor over time.
Hopefully applying these four investment principles could help me become a better, wiser investor. Even without money saved up to begin, over time, being a good investor could hopefully help me make rewarding investment choices — and build my wealth.