Who doesn’t dream of retiring early? I know I do. But turning this dream into reality requires a plan to accumulate wealth over time. For me, that involves adopting super-investor Warren Buffett’s method. Here, I outline four practical steps I employ to my own investment approach.
Don’t pick stocks, pick businesses
One of the biggest mistakes retail investors make is thinking of the stock market as a vehicle for making a quick buck. The rise of the meme stocks a couple of years ago made some investors rich. But for those who joined the party close to its peak, it led to catastrophic losses.
Buffett doesn’t chase the next hot stock. Instead, he buys into businesses with durable economic moats. In other words, he invests for the long term. As he once famously stated: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”.
Dry powder
Berkshire Hathaway, Buffett’s investment holding company, is a strong advocate of building up a war chest. His minimum cash position is $30bn! Having such a large cash position allows it to deploy capital when opportunities arise.
I maintain similar financial discipline. At the beginning of each month, I save an allotted amount from my salary. I never underestimate the importance of having some dry powder. One key advantage that retail investors have over institutional ones is that they can move much quicker to allocate capital in to the stock market.
Cultivate patience
Buffett is very selective in the stocks he acquires. He will sit on the sidelines, sometimes for years, before buying his favourite stocks.
I have always been a firm believer that the stock market will present me with an opportunity to buy into stocks on my wishlist. However, there comes a point when even a great stock can be overpriced. That is one of the reasons why I’m still holding off buying any FAANG stocks.
Be positive
Buffett’s mantra “never bet against America” has remained with him throughout his investment career. When he bought his first stock in 1942, the Dow Jones closed at 99. Despite witnessing multiple recessions and setbacks, today it sits 324 times higher.
2022 has been a pretty bumpy road for investors. However, what it hasn’t done is change my investment philosophy. When opportunities present themselves, I continue to buy with the mindset of holding for the long term.
There is an old adage in investing that goes something like: “More money is lost trying to anticipate a crash than in an actual crash itself“. The Covid crash taught me a lot in this respect. Even though I never caught the bottom, I’m so glad today that I remained a net buyer of stocks during that time.
Buffett is such a successful investor because he has maintained his optimism. For me, that means focussing on what is happening now. So, as I said, I am trying to build a cash buffer to capitalise on any stock price weaknesses.
Of course, I need to be aware of the risks. But if I’m always looking for the dark cloud on the horizon, then it is likely to put me on the wrong side of the trade in the long term.
