When it comes to building wealth and investing, you’d be hard pressed to find a greater expert than Warren Buffett. This legend of the investing world has managed to amass a fortune in excess of a hundred billion dollars during his many years in the financial markets, which has propelled the famous Oracle of Omaha to the very top of the list of the world’s richest people.
The good news is that in doing so, Buffett followed a set of simple rules that are common knowledge and that you can easily apply to your own investing. With a little patience and diligence, you’ll gradually accumulate an interesting fortune that you can then use to provide for your family, or perhaps to properly spice up the autumn of your life.
Just remember, this article won’t probably make you as rich as Buffet himself. To do that, you would need a little more than an article about investing. One of the biggest factor in amassing such a great amount of wealth is also luck. We can’t really teach you how to be more lucky, but we can certainly try to make so that you need a lot less luck than the regular Joe Schmoe.
And besides, even if you’re not as rich as Warren Buffet, we can still teach you how to get enough money to secure a nice, comfy and even a little posh life. Here are some tips on how to do that.
1) Think long term
First and foremost, it is important to remember that building wealth and, by extension, investing is a long haul. As much as we hate to say it, the advantage here is on the side of young people. Since, if you start out early, even the least amount of investment can turn into a great fortune. The sooner you get the ball rolling, the bigger it will be at the end.
A longer investment horizon means that you can keep your money working for longer and that it is easier to recover from all sorts of crises, as was the case at the beginning of the COVID-19 pandemic or, given the current market downturn in the wake of the Russian invasion of Ukraine.
Many studies have shown that investors who panic and sell off their portfolios hastily during major downturns will not achieve interesting results. Remember that if you are going to hold the asset for more than 20 years, a momentary 10% decline should not throw you off. Stick to your strategy and follow your investment plan.
The most important this you should remember is that every single crisis will someday pass. Even the greatest of economical depressions like The Great Depression have, in time, resolved itself. Don’t worry, great things always take time (they didn’t build Rome in a day).
The biggest enemy in these sorts of situations is inflation, but even that can be made better. You just have to know how.
2) Look for quality, not quantity
Closely related to long-term thinking is the need to be patient. You don’t just accumulate wealth overnight, and you may encounter many calamities along the way. We’ve mentioned one before that affected the entirety of 2022 and put wrinkles on the foreheads of even the most patient investors. And now there are even more to come. So what to do?
First things first, don’t just mindlessly browse and buy whatever you can. The only way that can go is down. You don’t have to have a team of professionals to research everything, but always measure twice. Buffett is famous for never rushing into anything – he considers each investment carefully at first, and only springs into action when he feels the price of the asset is significantly undervalued or when the future prospects of the company outweigh other factors.
A good tip is to view current downturns as opportunities to buy at a discount, so to speak. Whether you invest in precious metals such as gold or silver, go the tried-and-true ETF route, or become a stockpicker (like Buffett) and pick individual stocks, over time you will learn to recognize these discounts, which will accelerate your path to wealth.
And if you don’t have the time to research each individual stock and spend hours deciding on an investment, there are ways for other people to do it for you. One of these are the aforementioned ETFs
3) Have a safety net underneath you
The term “safety net” can mean many things, but in our and Buffett’s terms it is a kind of insurance policy that protects you from a significant drop in the value of your portfolio. One of the most important things is to never invest money you cannot afford to lose. Because if you put all of your saving into a risky investment, and then lose most of it, you have only yourself to blame.
Let’s say you have found an interesting company with an exceptional business model, solid finances, a competitive advantage and good prospects, and that it is built on good fundamentals. But it is quite possible that you are not alone and that increased investor interest has led to an “excessive” increase in its price, which is then mirrored by a P/E ratio well above the market average.
This is why it’s important to always do your research. Even if a company looks to be just going up, and it’s graph looks closer to a needle, chances are, that it’s going to go down. And when it does, it can crash hard.
You don’t have much room for error with a company like this. In the event of the slightest problem, be it economic or even a scandal related to the company itself, its value evaporates like steam over a pot, leaving you with a 50% loss and eyes to cry on.
4) Diversify your portfolio
Now we come to one of the key points of long-term investing, diversification. This is absolutely essential for retail investors, as it allows you to protect your assets from significant drops in value due to factors beyond your control, and therefore greatly improves your sleep. Diversifying is necessary for any investor, big or small. Because no matter what, it at least helps you reduce risk.
A properly diversified portfolio should contain a mix of assets from several different asset classes. It is absolutely crucial that these classes do not correlate with each other, by which we mean that their value should not move in tandem depending on what is happening in the world at the moment. It’s often best to not even focus on just one country. Instead of buying just american stocks, why not also invest in some companies from Switzerland?
So you can invest in the aforementioned stocks, ETFs or precious metals, but you can also put some of your funds into cryptocurrencies, for example, to benefit from their current decline. It depends on your preferences. If you’re a clairvoyant and weren’t afraid to get in early, you might just be getting a nice interest payment from the government on anti-inflation bonds.
It’s always good to take risks, but remember that those don’t always end with a good ending. Whenever you try something risky, always be prepared that it might just fail.
More adventurous individuals can set out to explore the choppy waters of alternative investments. But beware! Related to these unconventional expeditions is another of Buffett’s rules, which we’ll discuss in the next (and final) point.
5) Invest only in what you understand
Whichever way you go in the financial markets, make sure that your money is only invested in assets that you really understand. And that’s regardless of whether they are more traditional or alternative investments.
Buffett has made it known in the past that he never invests in companies outside of his area of expertise. It makes sense – To properly understand a company’s price fluctuations, you need to know its business model, prospects, financial position, long-term liabilities, etc. A secondary effect here is to reduce the level of investment risk, which is always desirable.
If you invest in something you don’t understand, there’s an increased chance that you will make a mistake. You might invest in a failing company, thinking that it will go up, only for it to continue falling, and taking your money with it. You’re also leaving yourself a lot more open to scams and unfavorable deals.
So, before you start investing in anything, make sure you get to know the asset (company, fund, bond, ETF) properly and understand what is pushing its price up and what, on the other hand, may lead you to take it for a roller coaster ride. And just like with a roller coaster, it’s going to be fun, but you’ll always end where you started, only more sick and with fewer money in your pocket.
In closing, we would like to express our belief that the path to wealth is truly open to everyone. Whether you save or invest, with a little patience, diligence, goodwill, and enough time, you can get your hands on some really interesting assets that you can then use for whatever you want.