The billionaire investor Warren Buffett has made many billions of pounds within one lifetime. He has done it in a variety of ways, but three moves I describe below have helped him build wealth. If I learn from Buffett and apply this trio of investing principles myself, could I also become richer?
I do not expect anything like Buffett’s level of wealth creation. But simply improving my investment performance could hopefully improve my long-term financial position.
One: buy stakes of great companies
Buffett has invested in many private companies. But although he has the financial firepower and expertise to make large private deals, Buffett has also made enormous investments in the sorts of publicly traded shares that small investors like me could buy today.
For example, I used to own shares in Apple. Buffett too has spent a lot of money on Apple shares. The current Apple stake of his company Berkshire Hathaway cost around $31bn to buy. At the time of Berkshire’s most recent annual shareholder letter, it was valued at over $161bn.
Why does Warren Buffett invest so much money in public companies whose accounts are a matter of public knowledge? He may not have any informational advantage – anyone can see Apple’s financial accounts, after all. But Buffett’s investing style can help him produce strong returns, as this example shows.
Rather than putting money into exotic types of investment, I am happy to follow Buffett and buy shares on the stock market. The publicness of company information can help me – I think I just need to apply the right investment approach to make it work to my benefit. If I can buy shares in great companies trading at am attractive price like Buffett, that might help me increase my wealth.
Two: obsess about valuation
But how do I know what is an attractive price?
Buffett spends time and effort focusing on valuation. Sometimes he does not buy shares in a company he likes for decades, because the valuation is not attractive at that time.
I see two key lessons here for my own investment. First, if I do not feel confident in valuing a share then it could be a costly mistake for me to invest in it. That is why, like Warren Buffett, I just walk away from shares where I lack the competence to make a valuation judgement. Secondly, I have spent time learning a variety of methods I can use to value shares.
Not overpaying can help me improve my investment returns and therefore hopefully my long-term wealth creation.
Three: Warren Buffett buys to hold
When the Sage of Omaha buys shares in a company, he does so expecting to hold them for years not just months or weeks. Indeed, he has said his favourite holding period is “forever”. Companies like Coca-Cola and American Express have been constant features of Warren Buffett’s portfolio for decades.
That is because he is not a trader. He is an investor with a long-term mindset who hopes a combination of strong business prospects and an attractive share price can help him benefit from a company’s performance. I think the same approach can help me too. I see more value spending my time in identifying great companies than in jumping in and out of short-term share positions frequently.
