What can Warren Buffett teach us about investing?
27/04/2017 Darren Rieger, Manager of Paraplanning and Financial Services Administration
Warren Buffett is to the investment world what Coco Chanel is to fashion – absolute royalty. The American business magnate, investor and philanthropist has earned a reputation for himself as one of the most successful investors in the world, and as of March 2017, is the second wealthiest person in the United States with a total net worth of $78.7 billion*.
Most investors who have the ambition to be the next Warren Buffett usually make the most obvious mistake on their path to expected fortune…they fail to consult the learnings of Warren Buffett himself!
So how did he become the most highly regarded investor in modern times? Well, you may be surprised to learn that he did not make the bulk of his money by actually being a great investor himself. Yes, he obviously built a portion of his wealth in this way, however his great fortune was created by leveraging his own expertise. Initially, Buffett attracted a modest pool of investors and then once he had proven himself to be good at his business, the pool of investors grew larger.
His secret was and is simple . . .
“The investor of today does not profit from yesterday’s growth” – Warren Buffett.
Make the right investments
One of the trademarks of Buffett’s investment career that has stood the test of time is to buy undervalued assets. This is especially true when purchasing real estate where his philosophy is to buy real estate based on income generation and not appreciation, and he continues to follow these principles to this day.
When it comes to the share market, Buffett has avoided the flashing lights and ringing bells of investing in high risk start-ups and dodgy stock tips that a lot of us have fallen victim to over the years. Instead, he uses two very simple rules that guide him when making investment decisions:
1. The first rule is to not lose money
2. The second rule is to not forget the first rule!
Now you may think that these rules are a ‘no brainer’ but it is amazing how many investors fail to follow such simple advice. Buffet’s investment fundamentals are sound and based in common sense i.e. invest into companies that:
- have a business that he understands with favourable long term economics
- are defined as having a long term competitive advantage in a stable industry
- have able and trustworthy management, and
- can be purchased at a sensible price.
Don’t be afraid to track the index
Those of you that are small investors may be asking ‘”how on Earth do I adopt the principles of Warren Buffett when I obviously do not have his level of start-up capital?”
The best piece of advice that he can offer to smaller investors is to put your money into index tracking funds as they can provide you with broad diversification at a low cost and will eliminate the risk of stock picking experts that may not be invested in correlation to the performance of the market.
How do we become smart with money? Luck can only get you so far and the old saying “the better I become, the luckier I get” is especially true when investing. Buffett’s father insisted that his son pursue a good education and once this was achieved, it has been the foundation for his success in investment markets today.
Buffett uses his money extremely wisely and believes that a lot of people today waste money. Instead of using his own money, he takes full advantage of leveraging into real estate and share markets by using other people’s money at affordable interest rates.
The following Buffett quotes hammer in his philosophy when it comes to investment time frames for shareholdings:
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”
“When we own portions of outstanding businesses with outstanding management, our favourite holding period is forever.”
“Time is the friend of the wonderful company, the enemy of the mediocre.”
Can you see the consistent theme in these statements? Investing is a long term strategy and, unless you’re one of those extremely lucky lotto winners, there is no ‘get rich quick’ scheme to lead you to great wealth.
For all those budding Warren Buffetts heading out to make your fortune, just remember that it is essential to be well informed, patient, cautious but, above all, realistic with your expectations and you will be well on your way to financial success.
If you would like to discuss any of the points raised in this article, or would like to speak with someone about your own investment goals, please call our office on 1300 726 082 and ask to speak with a financial adviser.
Image: The Huffington Post
General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
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