With a net worth of over $90bn, it’s fair to say that Warren Buffett could have retired far earlier than most. And yet the Sage of Omaha stays in the game for the sheer love of it.
Admirable as this is, I’d be happy to swap the (virtual) office for the (actual) beach as soon as possible.
Fortunately, the master investor has a few tips to help me, even if I were starting from scratch with nothing in the bank.
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Building wealth requires building good habits
“Most behavior is habitual, and they say that the chains of habit are too light to be felt until they are too heavy to be broken,” says Warren Buffett.
In reality, there’s nothing I can do about the direction of share prices. But there are some things I do have control over.
To get on the road to financial freedom, it’s vital to cultivate positive money habits. In practice, this might require a little soul-searching and learning to distinguish between spending on things that actually improve my quality of life and spending that does little more than hurt my bank balance. The money saved from cutting back on the latter can then be put to better use in the stock market.
Further down the line, it might mean funnelling some cash into my portfolio on the day my monthly pay arrives. It means not trading in and out of stocks and racking up costs in the process. You get the idea.
Achieving early retirement is hard but, as Buffett implies, it’s near impossible if I’m consistently working against myself.
Wait for the ‘fat pitch’
Some people may believe that the pursuit of early retirement is all about speed. You can’t reach financial freedom if you don’t try to accumulate wealth quicker than your average rat-race participant, right? Go, go, go!
This couldn’t be further from the truth as far as Buffett is concerned.
Taking a cue from baseball, he waits for what calls the ‘fat pitch’. This is when the odds of making a profitable investment are high enough to be worth the risk of ‘swinging’ for it. Put another way, it’s about buying shares in a great company when, for whatever reason, that company is temporarily out of favour and trading at a (very) reasonable price. The only caveat here is that it sometimes takes years for such a pitch to arrive.
But might the awful performance of markets in 2022 be such an opportunity? I think so. That’s why I’m already buying more shares, even though I know prices could have further to fall.
Sitting tight
Of course, buying when prices have fallen isn’t enough if I don’t understand exactly what it is that I’m buying. In fact, just throwing cash at anything is potentially a recipe for disaster (and most certainly not financial independence).
This is why Buffett advises that I only ever buy within my own ‘circle of competence‘. Put another way, I need to invest in things I understand.
And even if I do understand a business or sector, I still need to invest based on the level of risk I’m prepared to take. Throwing everything at just one company in the hope of retiring early smacks of gambling. Building stakes in 10-20 high-quality businesses makes much more sense.
