Nowadays people think of Warren Buffett as a highly successful investor worth tens of billions of pounds.
But Buffett’s wealth was not handed to him on a plate. Although he came from a respectable family, he is essentially a self-made man. He first bought shares as a schoolboy, and has been doing so for over eight decades.
By using parts of Buffett’s approach, I also hope to build wealth over the decades to come. He started with nothing, saved a little from a paper round to invest and went from there. Similarly, I think putting aside money from my everyday life to invest in the stock market could help me grow wealth over time.
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Take a long-term view
Buffett is a big believer in long-term investing. He does not buy shares hoping to sell them after a few months following a price jump.
Rather, he sees shares as small stakes in a business. So he looks for companies he thinks can do well over the course of years, then buys shares to hold for the long run.
Buffett’s annual letter to Berkshire Hathaway shareholders usually includes a rundown of his company’s largest shareholdings. These include firms such as Apple, Bank of America and Coca-Cola.
Why did he choose to buy these shares rather than others?
He is looking to buy into what he sees as great businesses trading at attractive prices. So Buffett looks for a firm in a large market with some advantage rivals cannot replicate, like a brand or patented drink formula.
Buffett diversifies
But why does Buffett invest in a variety of companies? After all, some of his picks have been great successes. He could have made more money by investing all his funds in them.
The problem with such an analysis is that it relies on hindsight. Ahead of time, nobody knows what will happen to a company. Even the best-run business can run into unexpected challenges that will damage its prospects.
Buffett adopts a well-known risk management strategy known as diversification. As the name suggests, this involves spreading one’s portfolio across a diversified range of shares in different industries. I do the same with my own share portfolio.
Put earnings to use
Some investors ‘compound’ their dividends, which means using them to buy more shares rather than spend them as cash.
Buffett says, “my life has been a product of compound interest”. By investing in companies and then using dividends from them to buy more shares, he has been able to build wealth. Compounding can be promising in the short term, but it is in the long term that its real power to create wealth becomes especially clear.
Putting money he earns back into earning even more has been one of the reasons Buffett has been able to build so much wealth in his own lifetime. I am applying some of the lessons from his career even as I invest on a much more modest scale.
