Billionaire investor Warren Buffett has been buying and selling stocks for an incredible eight decades. Here are three ways I can follow his example to improve my own investing results, especially if I’m just starting out.
Live within my means
Do not save what is left after spending, but spend what is left after saving.
Warren Buffett
The ‘Oracle of Omaha’ is famously frugal. He lives in the same home he bought back in 1958 and doesn’t care much for luxury goods. Indeed, despite being able to afford an army of live-in chefs, he often grabs breakfast at McDonald’s on the way to the office.
In the 2017, in the HBO documentary ‘Becoming Warren Buffett‘ he says: “When I’m not feeling quite so prosperous, I might go with the $2.61, which is two sausage patties.”
He continues: “$3.17 is a bacon, egg and cheese biscuit, but the market’s down this morning, so I’ll pass up the $3.17 and go with the $2.95.”
Buffett is showing in real time here how to live frugally. If the market is down and he’s feeling poorer, he’s not going to start splashing out. And fellow billionaire and friend Bill Gates once recounted how Buffett took them for a McDonald’s meal and offered to pay with coupons.
Now, investors don’t have to be this hardcore when it comes to frugality. But by cutting frivolous discretionary items, I can save money and have more to invest.
Unsurprisingly, Buffett also advises against getting into debt. We want interest to work for us rather than against us. Consequently, he also doesn’t like to invest in companies that have too much debt. I’d follow this principle too.
Understand the importance of dividends
If you don’t find a way to make money while you sleep, you will work until you die
Warren Buffett
This year, Buffett’s company Berkshire Hathaway is expected to receive around $5.7bn in dividends from its massive equity portfolio.
He can stockpile this cash, earn interest upon it, then have it ready to deploy whenever an attractive investment opportunity arises.
While my own portfolio will never come close to matching Berkshire’s, the principle here is the same. I can keep the cash generated from my dividend stocks and use it invest in more shares.
Adopt a holding period of ‘forever’
If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
Warren Buffett
According to data from investing platform eToro, the average holding period for US stocks was 10 months in 2022. This was down from more than five years in the mid-1970s. Similar research backs this up.
Clearly, we’re living in a different age to 45 years ago. Everything is much faster today. I can whip out my phone, press a button and sell shares in seconds. Also, the constant stream of buy and sell recommendations on social media can make things harder.
But Buffett’s investing career demonstrates the power of long-term investing. He has held his shares of Coca-Cola and American Express for decades. They have multiplied his original investments many times over and keep paying dividends.
That’s why Buffett says his favourite holding period is “forever”. It literally pays me to also think like this.
