Warren Buffett investing tips I’m using to build passive income

Building passive income isn’t easy but with these tips from top investor Warren Buffett, James Reynolds thinks he is on the right track.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Fans of Warren Buffett taking his photo

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Warren Buffett may well be the most successful investor of all time. He became a billionaire in the 1980s and his stewardship of Berkshire Hathaway has seen the company’s A-shares reach a value of over $400,000. What can we learn from him? Well, lots actually. Over the years, through interviews, books, and letters, Buffett has given a detailed account of how he makes the sorts of investments that reap double or even triple digit returns. Here are some of his tips I’m using to help build passive income for my own portfolio.

Fundamentals, not share price

Warren Buffett always stresses the importance of the business fundamentals. For the most part, watching a stock go up and down is stressful, exhausting, and unhelpful. Many new investors make the mistake of buying when the price goes up and selling in a panic when it goes down. But so many factors effect share prices in the short term. Not only is it impossible to predict these swings, but often they tell us nothing about the health of a company.

If, however, an investor familiarises themselves with how much debt a company has, how much cash it has on hand, and if it turns a steady profit, they will be in a much better position to know if the company is healthy or not.

How does this apply to passive income? If a company pays a dividend (a portion of profits allocated to shareholders) it’s important to know if the amount it pays is affordable. Will paying dividends today hurt the company in the long run? You don’t need to be a genius to read a company’s financial statement, and it helps us choose which companies are worth investing in.

Invest in what you understand

The next most important tip is understanding what you are investing in. Buffett has often been criticised for missing out on the tech boom of the last 20 years. But he has always been open about the fact that he doesn’t understand how those companies make money, so he doesn’t invest in them. That’s not to say that Facebook or Google are bad companies, only that he wouldn’t be able to tell the difference between them and bad tech companies. I personally don’t invest in banking for this same reason, but I do invest in renewable energy.

It is always a good idea to try and learn more about different business sectors as we grow more confident in our investing, but Buffett suggests we focus on what we already know well. Peter Lynch, another famous investor, echoed this sentiment in an interview with CNN. “I know restaurant managers who invest in IBM, but I always ask why they don’t invest in restaurants. They know what sorts of challenges they face and know if a restaurant is profitable. They know how that business works”.

Patience

Lastly, Buffett is adamant that an investor should be patient. There might be a great company out there, but if the share price is too high, it’s better to wait for it to come down. There could be a market crash and your investments may go down in value, but if you wait the price could come back up.

It might not feel like it, but stock market will always present new opportunities. We just need to wait for them.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »