Warren Buffett’s achievements within the investing community are well known. The billionaire has built his fortune by mastering stock picking and sticking to a disciplined investment strategy.
But unlike many of his peers, he’s been incredibly transparent about his approach, teaching his techniques in annual letters dating back to the 1960s.
Following in his footsteps does not guarantee the same results. After all, he has many more resources to hand than most of us. But his advice could pave the way to a far more comfortable lifestyle in the long run, even for those with no savings today.
In fact, given the ongoing economic volatility in the UK, many households are currently strapped for cash. And while there are no easy short-term solutions, using his wealth-building tips can better position individuals and families the next time the economy decides to throw a tantrum.
Don’t follow the crowd
Stock prices in the near term are driven by mood and momentum. Over short periods, mediocre businesses can skyrocket on nothing else other than unrealistic expectations. And investors lured into this upward trajectory often end up overpaying for a stock that inevitably tumbles back down to Earth.
Chasing the latest trends is a proven method to destroy wealth. That’s why Buffett deliberately avoids companies when investors are being too optimistic. In fact, one of his more famous quotes is to “be fearful when others are greedy and greedy when others are fearful”.
But simply buying unpopular companies isn’t enough. Buffett is meticulous in his research, attempting to identify winning characteristics and competitive advantages. After all, a lot of times stocks are unpopular for a good reason.
Understand the role of diversification
Diversifying an investment portfolio is arguably one of the easiest and most effective ways to reduce risk. And yet, Buffett has a reputation for preferring concentration. In his own words, “diversification is protection against ignorance… [it] makes very little sense for anyone that knows what they’re doing”.
Does this mean diversification is for idiots? No. The point Buffett is making is that all too often, investors seek to diversify for the sake of diversification. Consequently, portfolios end up being filled with average businesses that will hamper returns just to tick off some boxes.
In other words, while riskier, Buffett believes it’s far better to own a handful of wonderful companies rather than 20 mediocre ones. And it’s an investing style that I’m personally fond of as well, despite the increased volatility that comes with a concentrated portfolio.
Index investing is a viable alternative
Not everyone is cut out to be a stock picker. It demands a lot of time, effort, and emotional discipline, especially during economic wobbles. And for those unwilling to endure the stress, investing in a low-cost index fund can still yield fantastic results for next-to-no effort.
Buffett is an avid fan of the S&P 500. But the UK has its own indices, like the FTSE 100 and FTSE 250, for investors to track. These investment vehicles can average deliver returns of around 10% a year. And investing just £100 a month is enough to potentially build up around £20,500 of savings over 10 years, or £76,000 over 20.
