By his late thirties, investor Warren Buffett was already comfortably well off. But even a decade later – in his late forties – Buffett had made less than 1% of his future wealth.
I think that example can be inspiring. If I was in or approaching my late thirties and had no investments so far, rather than panic, I would apply some lessons from investing guru Buffett to try and build my long-term wealth. Here are three of them.
Keep things simple
Stick to what I know. Invest mostly in shares of large, blue-chip, established companies. Be careful about taking risks. Do not rush.
Do those sound like the sorts of principles that could make me rich? Written down, they sound almost pedestrian. Yet that is a summary of exactly how Buffett has been investing for decades now, often with phenomenal results.
If I was starting with no investments decades into my adult life, I might be keen to get going fast. That could lead me to make costly mistakes. That is why I think Warren Buffett’s approach is so appealing. He does not try to take short cuts or speculate in exotic investments he does not really understand.
The Buffett approach is simple: find great companies with compelling prospects and an appealing price tag, then swap some hard-earned cash for a stake in the business known as a share. After that, keeping the share for years should hopefully let the holder benefit from the firm’s long-term success.
Set the bar high
That does not mean that I should invest in the first appealing company I find, however. In fact, Buffett sometimes waits years or even decades before putting his money into a firm.
That is because he is not only hoping to find good investments. He is aiming to make great ones.
Over time, the difference between a merely good investment and a great one can be huge. Buffett’s company Berkshire Hathaway spent $1.3bn building its stake in Coca-Cola. At the time of Buffett’s most recent shareholders’ letter, it was valued at $23.7bn. On top of that, Berkshire has received decades of dividends from the drinks maker.
That investment has been held for decades, reflecting Buffett’s long-term approach to investing. But the performance of the investment is still staggering and illustrates how helpful a great company can be in helping build wealth.
If I had invested in Coca-Cola five years ago, the shares would now be worth 41% more than I paid for them. If I had instead invested in UK rival Britvic, the share price gain in that period would have been just 3%.
Diversification
If Buffett is such a good investor why does he not put all his money into his favourite stock?
In fact, most of his net worth is tied up in shares of one company, Berkshire Hathaway. But within Berkshire’s portfolio, Buffett stays diversified. He recognises that even the best company can run into unexpected difficulties. So he always makes sure to spread his investments, which I think is a useful approach for my own investments.
