Looking at an empty bank balance can be a disheartening experience. But while I might never have the riches enjoyed by billionaire investors like Warren Buffett, I can at least apply some lessons from their investment careers as I try to build my own wealth on a more modest scale.
Here is how I would go about that, from a standing start.
Start small and limit risks
Buffett began investing as a schoolboy using his own money, so he knows what it is like to start in the stock market with almost nothing.
In itself, that is not a barrier to long-term success. If I had no savings, I would get into the habit of regularly putting aside what funds I could afford to invest, based on my own circumstances.
But, crucially, I would pay close attention to risk management.
Buffett tends to avoid what he sees as risky investments, no matter how potentially lucrative they may seem. Instead, he always seeks to invest in high-quality businesses he thinks offer great value, even when considering the risks.
Starting with a small sum is one thing. But there is never any need for me to make it even smaller by taking silly and unnecessary risks!
Buffett buys what he knows
Buffett stresses the importance of only investing within a circle of competence.
This will be different for each investor. But I think I have more chance of deciding whether a business is selling for an attractive price if I really understand it and can properly assess its model.
As a Google user, I feel I understand the Alphabet business well enough to be comfortable investing in it. But the same is not true of THG. I do not really understand its business well enough to decide confidently whether it merits my investment.
A few great choices
One advantage Buffett has enjoyed is the length of his investing career. It has stretched over many decades.
Rather than running around like a headless chicken, Buffett spends a lot of time researching and analysing — but very little time actually doing something. He prefers to wait for what he sees as an outstanding opportunity, then invest for decades at a time.
Doing just a small number of things and taking a long-term perspective can amplify the benefits of investing in a promising business, just like it can increase the negative impact on a portfolio by investing in a dud one. Choosing shares carefully matters!
Staying mainstream
Buffett does still invest in some duds though. He therefore diversifies his portfolio to spread his risk – and so do I.
But I also find it interesting that his portfolio is stuffed with household names like Apple and Coca-Cola.
He is not dabbling at the fringes of the stock market in small, unknown firms. His portfolio consists of shares in large, proven and usually well-known companies. As Buffett proves, even already famous businesses can sometimes produce extraordinary investment returns.
