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How I’d invest £500 with 4 lessons from billionaire Warren Buffett

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close-up photo of investor Warren Buffett
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Anyone new to investing and looking for sound advice could look to Warren Buffett. The 90-year-old American billionaire and so-called Oracle of Omaha is widely regarded as the world’s greatest investor. Despite his advancing years, Buffett still runs US conglomerate Berkshire Hathaway, a $664bn giant. Furthermore, despite a net worth of $110bn, Buffett has pledged to give away 99% of his wealth to good causes during his lifetime. For advice on investing, philanthropy and life, I can’t get much better than ‘Uncle Warren’ — even if I had only £500 to spare.

Two vital life lessons from Buffett

1) “Rule #1 is never lose money. Rule #2 is never forget Rule #1.”

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Warren Buffett’s golden rule is simple, but incredibly powerful. In order to build wealth, he tries to avoid making losses. Of course, it’s almost impossible to avoid the occasional losing investment. Even Buffett has lost billions backing the wrong businesses. But it can be done. For example, since starting investing in 1989, my wife has never made a loss — not one penny. By being ‘boring’ (buying shares in good businesses and low-cost funds and holding them for decades), Mrs D let ‘time in the market’ do the hard work. Also, the more any of us research and understand potential investments, the more likely we’ll eventually buy what’s right for us.

2) “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

Warren Buffett is fiendishly intelligent, but firmly insists that a high IQ isn’t necessary to be a good investor. Other personal qualities are far more important, such as self-discipline, self-control, determination and persistence. The really smart investors are those who, when greed and fear rule the markets, keep investing while there’s blood in the streets. Anyone easily swayed by emotions — and the animal spirits of others — could find investing a much harder task.

Two warnings from Warren Buffett

3) “With high fees, it will usually be the managers who reap outsized profits, not the clients.”

Over 30 years ago, as a young man starting my career, I opened a small personal pension. Today, that pension’s performance has been utterly massacred by excessively high fund and admin charges. Indeed, perhaps half of my total returns have gone to the pension provider, rather than to me. Therefore, before investing in any investment product or account, I carefully check all initial, one-off and ongoing charges and fees. Why work and save so hard just to make investment managers mega-rich?

4) “The one thing I will tell you is the worst investment you can have is cash.”

Occasionally, and notably during market meltdowns, cash can be king. But Warren Buffett has said: “Cash is going to become worth less over time. But good [investments] are going to become worth more over time.” With Berkshire Hathaway’s cash pile exceeding $145bn, I’m sure the Sage of Omaha would love to put it to work in a great business or investment. I keep a cash nest egg to cope with life’s inevitable ups and downs. However, beyond this, it makes sense to me to risk a proportion of my wealth in stocks and shares. Doing this over a lifetime can yield results that are truly staggering, although stocks do always carry risk of losses as well, of course. 

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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