A lot of people hit a certain point in life with little in their bank account. Rather than sit and worry about that, I would find it more useful to figure out a plan to try and change it! That is why I would look to learn from investors with a proven track record of success, like billionaire Warren Buffett.
Here are five practical steps I would take to try and apply the Buffett method to my own investing.
Invest for the long term
Buffett has a long-term investment mindset. He is not trying to earn money that can pay for his living expenses next month. Instead, he has always been thinking far ahead with the aim of building substantial wealth.
Today’s financial needs can seem pressing. But taking a long-term mindset can help us make great investments and benefit from their performance over the years.
Stick to what you know
Buffett is fanatical about sticking to his circle of competence when investing. That means he only invests in companies he understands. Successful investing is about spotting great opportunities that are available at an attractive price. To assess valuation, it is essential to understand a company’s business model.
Focus on downside risk not just upside potential
Buffett says that the first rule of investing is not to lose money – and the second rule is never to forget the first one. That may sound trite, but I think it is actually profound advice that could help me build my wealth.
It can be tempting to try and make up for lost time by investing in risky but potentially lucrative shares. Buffett takes the opposite approach. Although he looks at the possible upside of an investment, he pays close attention to risk indicators. If a share looks too risky for his comfort he will not buy it, regardless of how rewarding it could potentially be.
Adopt a valuation method
How do you know whether a share might be a good investment? Different investors use a variety of methods, from looking at the firm’s likely future earnings, to analysing their balance sheet. It may be that different methods can be helpful, but what is key is that Buffett always uses one method or another to value a company.
He does not buy shares just because he has a good feeling about them or has seen their price crash. Instead, he assigns them a valuation and compares it to the current share price. He already thought American Express was a great business, but it was only when its share price crashed in the early 1960s that he considered the valuation attractive enough to merit buying the shares.
Investing without using a valuation method is not really investing, in my opinion – it is simply speculation. Like Buffett, I always use at least one valuation method when weighing up shares I could buy.
Wait for brilliant opportunities
Starting to invest in our thirties or forties, it is easy to feel rushed. That can be a costly mistake. Buffett ignores investment opportunities he thinks are simply good – and waits for ones he thinks are great. That might mean waiting for years.
I think adopting that patient approach can help me as I try to build my wealth.
