Lots and lots of people dream about building wealth. Having a dream however, is not the same as having a practical plan. By learning from legendary investor Warren Buffett, I hope I can build wealth over time by taking concrete steps.
Here are some of them.
It takes money to make money
It is fine to have nothing in the bank and plan to start investing, but I would need to find money somehow. For example, I could look at my budget and decide what feels like a realistic, manageable sum to put aside on a regular basis for buying shares.
Everyone’s financial circumstances are different, so I would decide on a plan that worked for me.
Buffett started with little. But he has been able to invest because he has generated money to put into the stock market.
Invest then reinvest
One source in Buffett’s case is his existing investments. When his company Berkshire Hathaway receives a dividend it does not use it to fund a dividend to its own shareholders.
Instead, Buffett puts the money to work by using it buy new shares or businesses. That principle of reinvesting earnings is known as compounding. It can work on a very small scale as well as a large one.
Try never to overpay
Like almost all investors, Buffett has had his share of disappointments.
By focusing not just on whether he likes a business but also on its valuation, he improves the chances of investing success.
Every company, no matter how great it is, has a fair price. Different investors may not agree on what that price is. But that does not mean it does not exist.
Buffett tries never to pay more than he thinks a company is worth. If he can buy at significantly less than he thinks a business is worth, over time if that valuation gap closes, that could make his shareholding worth more than he paid for it.
Do a small number of things, well
Buffett keeps his portfolio diversified, a common risk management practice any investor can apply. But a large part of his portfolio is made up of just a handful of shares.
There is a lesson in that. Instead of trying to go after dozens of opportunities and hoping to strike it lucky with one or two, Buffett is highly selective. He sticks to industries and companies he understands, he invests only occasionally, and he likes to hang onto shares for years, or even decades.
Instead of treating the stock market as something that rewards frenetic activity, Buffett treats it as a place that throws up brilliant opportunities only occasionally.
When it does though, he takes action.
