Warren Buffett’s investment achievements are outstanding. He’s among the richest people in the world and has gained his wealth from simply investing in companies. Furthermore, he’s done so by adopting a number of simple principles you can also live by and use to generate a significantly higher net worth.
Spending
Perhaps the most surprising thing about Warren Buffett is his view on spending. While he could easily afford multiple houses, cars and other material possessions, he lives in the same house as he did when he was a young man. It’s incredibly modest for a multi-billionaire, while his humdrum car and lack of lavish taste provide further evidence that he’s a man who could live well within his means even if he had a lot less.
This goes against how most people manage their finances when they achieve a relatively high level of wealth. Buying cars, houses and other material possessions is considered the norm if they become affordable. However, Buffett would rather reinvest his profits for future growth and if you’re able to do that too, your returns will be significantly boosted in the long run.
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Investing
Buffett’s investing style is well known. He seeks out companies with a distinct competitive advantage over their rivals, whether that be because of customer loyalty, a low cost base or a dominant position within an industry. He also seeks to buy shares in those companies at a fair price to allow for capital growth to be boosted by an upward rerating in valuation.
Buffett’s investment style, therefore, is incredibly simple. He shuns the complicated modelling techniques of Wall Street in favour of a method that can be mirrored by anyone who has the time to research stocks. Clearly, his approach hasn’t always been successful and the failure with Tesco is a notable example of him overestimating the size of a company’s economic moat.
However, his strategy is relatively low risk in terms of buying well-established businesses rather than newly-established startups. This provides his portfolio with a degree of stability and consistency over the long run, which can be replicated by any investor.
Portfolio management
In an era when diversification is considered a requirement for all investors, Buffett bucks the trend. He holds a highly concentrated portfolio that means he’s far less diversified than many investors. While this increases company-specific risk in his portfolio, it could be argued that it enables him to outperform the wider index and that it means he only invests in his very best ideas.
Buffett’s holding period is rumoured to be forever. This means that his holdings have time to come good, with new strategies and new products having sufficient opportunity to make a positive impact on the company’s (and Buffett’s) bottom line. This long-term view also provides Buffett with the time required to wait for the best opportunities and to be patient when his returns aren’t as high as he hoped for.
So, for investors who are willing to sacrifice short-term spending gratification for long-term returns, who can adopt a simple but highly successful strategy, and who can back their judgment on specific stocks for the long term, the opportunity to become the next Warren Buffett is very much on offer.
