I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor like him.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Billionaire investor Warren Buffett has had a very successful career in the stock market. Most people may never create anywhere near as much wealth as Buffett, but that does not mean we cannot still learn useful, practical lessons from him.

Here is a handful of helpful hints from his career I hope can improve my own stock market performance.

1. Be clear about objectives

Buffett knows what he wants and acts on that basis. That helps him stay focussed on the prize and act in a rational level-headed manner.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

For example, he has never tried to get rich overnight but instead has taken a long-term approach that emphasises considered decision making, measured risk management and realistic expectations about what any given business might be able to achieve.

2. Stick to what you know

Buffett has repeatedly discussed the importance of sticking to his “circle of competence” when he invests. I think his investment in Coca-Cola (NYSE:KO) demonstrates that. He has been consuming its products for decades and sat on its board for many years.

Why does sticking to what you know matter? It makes it easier to assess the potential value of an investment and whether a share price might be a bargain. Putting money into something you do not understand is not investment, but speculation.

3. Look at end market size

Coca-Cola has a lot going for it as a business. One of those things is that demand for soft drinks of one type or another is likely to remain high for decades to come.

From an investing perspective, that matters, because for a company to do well it helps to be addressing a large potential market. From Bank of America to Apple, Buffett’s share portfolio is stuffed with businesses that benefit from large market sizes.

4. Standing out from the crowd

But Coca-Cola is not the only soft drinks available. It is a crowded marketplace. Coca-Cola does well partly because it first identified a large market, then found ways to set itself apart from potential competitors. Those include distinctive branding, proprietary product formulas and a distribution network that spans the globe.

Having a competitive advantage can help give a company pricing power, driving profits.

Buffett has made billions of dollars thanks in part to spotting companies with strong pricing power. Many such companies, like Coca-Cola and Apple, are there in plain sight. Doing well in the stock market, as Buffett’s portfolio shows, does not have to mean investing in small or little-known enterprises.

5. Keeping the portfolio diversified

But while Buffett has held Coca-Cola shares for decades, earning billions of pounds in dividends along the way, he has never poured most of his money into that one share.

As a seasoned investor, Buffett knows that even great companies can sometimes run into unexpected difficulties. A sudden surge in ingredient or packaging prices is an ongoing risk for Coca-Cola’s profit margins, for example.

So Buffett keeps his portfolio diversified across a range of different shares. Even as a private investor with limited means, I do the same.

However, don’t buy any shares just yet

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Secure your FREE copy

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s what Stocks and Shares ISA investors are buying in 2025 to build a second income

Which shares are investors buying right now in the hope of eventually retiring on a healthy second income? Quite a…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Oh dear! Warren Buffett says people should only invest in companies they understand

Warren Buffett, the American billionaire, says research is the key to being a successful investor. But our writer thinks it’s…

Read more »

Investing Articles

How much would an investor need in an ISA to earn a £700 monthly passive income?

Ben McPoland digs into some numbers to show how a Stocks and Shares ISA portfolio could eventually throw off a…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Now that’s a surprise! The Lloyds share price went up despite disappointing results

The Lloyds Banking Group share price reacted positively to its 2024 results. Initially, our writer struggled to understand why.

Read more »

Investing Articles

Could this FTSE 250 trust outperform Rolls-Royce over the next 5 years? I think so — and then some!

Our writer believes this US-focused FTSE 250 investment trust could have the potential to beat Rolls-Royce's price performance by 2030…

Read more »

A graph made of neon tubes in a room
Investing Articles

Here’s why the Standard Chartered share price jumped 5% on FY results

Investors have pushed the Standard Chartered share price higher in the past 12 months. Judging by these results, it seems…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

3 little-known UK shares for investors to consider buying

UK shares outside the FTSE 100 and the FTSE 250 don’t get much attention. But there are some quality businesses…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Glencore’s share price is 40% off its highs. Time to consider buying?

Back in 2021, Glencore’s share price was near 575p. Today however, it’s near 330p – around 40% lower. Is this…

Read more »