Around my 30th birthday (in 1998), my father asked me a tough question. He said: “If you’re so smart, why aren’t you rich?” I immediately grasped what my dad was getting at. I’d been working since 1987 (and full-time since 1991) and earned a good wage. I worked in the financial sector, so I knew quite a bit about the art of investing. Yet at that time, I was very far from being rich. My dad’s question hit home hard, so I changed my ways. Within a decade, I could call myself well-off, if not full-on wealthy. And I got there with some ideas from mega-billionaire investment guru Warren Buffett. Here’s how the Oracle of Omaha helped me to build wealth.
Warren Buffett on budgeting
Buffett once remarked: “Do not save what is left after spending, but spend what is left after saving.” I used to earn good wages, but I spent far too much on living large. To free up more money to invest, I started ‘paying myself first’. In other words, I withdrew a fair chunk of my wage on payday to put aside for my future. Then I was free to spend the remainder, having deducted my savings upfront. Of all the good habits I came to learn, this was the most powerful by far.
Warren Buffett on cash savings
Another lesson that Warren Buffett taught me is that cash savings wouldn’t make me decent returns over time. Over decades, falling interest rates and inflation (rising prices) have combined to dramatically reduce returns from cash savings. Indeed, Uncle Warren once said: “The one thing I will tell you is the worst investment you can have is cash. Cash is going to become worth less over time.” Hence, after building up a reasonable cash emergency fund (a few months’ expenses), I invested all of my spare money into shares.
Investing for the long term
On investing, Warren Buffett famously declared: “Rule #1 is never lose money. Rule #2 is never forget Rule #1.” He also remarked: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” As a value investor, I keep these two principles in mind when analysing stocks and shares. As a younger investor, I often lost money by punting my capital on highly speculative and small-company shares. These days, all I do is seek out hidden value among mega-cap companies with excellent pedigrees. Like Buffett, today I know that “Price is what you pay. Value is what you get” Hence, I love buying beaten-down shares in solid businesses.
Buying when others are selling
Another vital lesson Warren Buffett taught me is not to be spooked by stock-market crashes. That’s just as well, because I’ve lived through four in 35 years as an investor (October 1987, 2000-03, 2007-09 and spring 2020). On price dips, WB said: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” Also, he once declared: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.” Thus, during last year’s March market meltdown, my money went 100% into shares in order to benefit from the subsequent rebound. Thanks for the great advice, Warren!