While billionaires such as investor Warren Buffett may be rolling in cash, many people are not. Although he was born into a well-off family, Buffett is self-made. His financial success is the result of applying some straightforward investment principles across many years.
His career shows that a long-term timeframe can help investment returns. So if I was in my thirties and had no savings, I believe following these Buffett principles could still help me build wealth. Here are three of them.
Simple not complicated
Some people have the idea that building wealth must involve investing in some very complex businesses.
Not Buffett. He sticks to what he calls his circle of competence – areas and industries he understands. I think doing the same could put me in a better position to assess whether a company has promising prospects and how attractive its share price is.
Buffett also tends to invest in industries that have fairly straightforward, well-proven business models such as retail, insurance and railways. That sets him apart from some investors who put their money into firms that lack transparency and rely on financial engineering.
Conviction investing
Buffett passes a lot of investment opportunities by. In fact, over the course of his long career, I reckon he has passed over thousands. That is because he is what I would term a conviction investor. He does not buy shares in companies he simply thinks could do well. He does not invest based on a hunch, or a good feeling about management.
Instead, he waits until he feels very confident a business is a great investment. That allows him a margin of error compared to investing in companies he thinks are merely good.
By waiting for those truly great investment opportunities, Buffett has been able to build huge wealth. Even the ‘Sage of Omaha’ is not always right though, so he diversifies across a range of shares. As a private investor, I think that is a wise risk-management principle for me to adopt too.
Warren Buffett and dividends
A lot of investors spend time considering whether they should focus on growth or income shares. Buffett invests in both. He certainly recognises the lucrative potential of dividends and some of his holdings generate large amounts of cash. But he also invests in shares that have a low dividend yield, such as Apple.
He recognises that building wealth can come from earning dividends, profiting from share price growth – or both. So although Buffett owns income shares, dividends are not a prerequisite for him to invest.
I think that is a useful lesson for me. If I wanted to build wealth, dividends could help me do it – but so could share price growth. Rather than restricting myself to only one style of investing, I would keep the Buffett approach in mind and focus on my long-term goal of building wealth.
There is more than one way to skin a cat, after all.