Most investment journeys start later in life. All too often, people work non-stop only to turn 40 and realise retirement is approaching far quicker than expected. Fortunately, it’s never too late to start getting serious about building wealth. And when using the stock market to do it, I think following billionaire investor Warren Buffett’s method is one of the most prudent moves.
1. Start saving consistently
Investing in stocks and shares requires capital. Sadly, borrowing money for investments through a margin account will send the risk profile through the roof. In fact, that’s why Buffett explicitly says not to do this. So the best solution is to have a steady stream of capital stemming from a savings account.
By reserving a bit of capital each month, over time there will be enough to start making investments. Plus, with interest rates now on the rise, the near risk-free returns of savings accounts are far more enticing than a few years ago.
However, being consistent with savings each month can be surprisingly challenging. Expenses tend to start cropping up and lifestyle sacrifices usually have to be made. But this also embeds a level of financial discipline that can go a long way in the world of investing.
2. Only buy and hold the best
In the short-term, stock prices are driven by mood and momentum. And it’s possible to make some money from predicting these trends through trading. But being an investor like Buffett requires ignoring all this noise and focusing squarely on the underlying business.
After all, at the end of the day, shares are just tiny pieces of an enterprise. And in the long run, the share price is driven by the success of the company. As such, Buffett is only interested in finding the best businesses and holding onto them for decades. In fact, the ‘Oracle of Omaha’ is often quoted as saying his favourite holding period is “forever”.
So the question now becomes, what makes a company high quality? There are a lot of factors that investors need to consider when picking stocks. Some of the most critical, in my opinion, include:
- Corporate culture
- Business model
- Competitive advantages
- Financial health
- Operational efficiency
- Profitability
- Risk exposure
3. Stay within a circle of competence
Businesses can be immensely complicated entities. And since analysing one requires understanding it, Buffett has always recommended staying within a circle of competence. This means investors should only consider companies within industries they are familiar with.
Beyond making the research and analysis process far easier, investors will also be more aware of external threats that aren’t immediately obvious.
For example, in the semiconductor industry, a grand total of just one company based in the Netherlands is responsible for making all the machines needed to manufacture chips on the planet. Any disruptions in shipments could have severe knock-on effects on other players in this space, including industry leaders.
