Building wealth is not necessarily about what one starts with so much as how to use it. Take billionaire investor Warren Buffett as an example. He first bought shares using money he had earned on a schoolboy paper round. Today, he is among the wealthiest people on the planet.
There is one tactic Buffett uses when investing that I think helps explain a lot about his success. Fortunately, I can apply the same tactic building my own share portfolio, no matter how modest my funds are.
Driving long-term outperformance
Lots of investors do pretty well in the stock market. But only a few do brilliantly, like Buffett. The compounded annual gain in per-share value of his firm Berkshire Hathaway between 1965 and 2022 was 19.8%. To achieve that sort of annual gain for a few years is one thing (and already impressive), but to manage it over more than half a century is an incredible feat.
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Something that sets apart the good from the great, in investing as elsewhere in life, is that outstanding performance is often driven by a fairly small number of brilliant results.
Many investors manage some such brilliant successes. But, over time, a lot of shares in their portfolio do just alright, or worse. That brings down the average performance, as money that could be invested in the strongest performers is tied up in shares that end up doing far less well.
Fat pitches
That is why Buffett waits for what he sees as the truly brilliant investment ideas. Using a baseball analogy, he refers to such an opportunity as a ‘fat pitch’.
He explains: “All day you wait for the pitch you like; then, when the fielders are asleep, you step up and hit it.”
In fact, Buffett sometimes waits for years at a time. He was following IBM for almost half a century before investing in it (although it still did not turn out to be one of his best moves in the end).
Does this approach work for him? It certainly seems to. Writing in this year’s annual letter to Berkshire shareholders, he had this to say: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”
Not only that, but he pinned Berkshire’s success on a long-term investing mindset and “about a dozen truly good decisions.” In the case of Buffett at Berkshire, that means about one every five years.
Investing like the best
Can I adopt the same tactic? Absolutely! I may not have his cash pot or research resources. But no matter what types of shares I buy, or how much I invest, I can adopt a Buffett-style selectiveness where I focus on finding only brilliant investment ideas.
That takes time, patience, and effort. But it does not necessarily require a lot of money. That is why this tactic that works for Buffett could also work well even for a small private investor like me.
