Putting money away for the future is sound financial planning. But not everyone does it. If I had no savings and wanted to try and build my long-term wealth, I would draw some inspiration from the investing career of billionaire Warren Buffett.
Why Buffett?
He built his fortune himself, investing over many decades rather than inheriting wealth. He has demonstrated an ability to make billions of pounds in the stock market. By applying some straightforward principles he has shared publicly, Warren Buffett has provided inspiration for investors of far more modest means.
Focus on the future
When Warren Buffett looks for shares to buy he does not pay too much attention to what is happening in the economy today, or even this year.
That is because he is a long-term investor.
Buffett thinks of buying shares as gaining a stake in a business. So he looks for businesses he believes have the characteristics that can drive long-term success. Those could be things like a profitable business model and strong ability to compete even in a crowded marketplace.
His investment in Apple is an example. Buffett did not buy into the tech giant because he wanted to benefit from strong sales in a given quarter due to a new model launching. He was looking to the long-term prospects of the company, based on factors like its installed customer base and strong brand.
Valuation is key
That does not mean Buffett totally ignores what is going on today.
Even a brilliant business can make a terrible investment, if one overpays for it. As the price of shares in a company like Apple move up and down, some days or years will offer a cheaper opportunity than others to buy in.
Buffett does not necessarily need a business to be cheap: he often talks about a “fair” price rather than necessarily a cheap one. But he does try to buy shares for markedly less than he thinks they will be worth over the long term, based on his assessment of a company’s prospects.
Margin of safety
Nobody, including Warren Buffett, knows what will happen in the future. He has invested in some promising businesses that have gone on to disappoint.
That is why he wants to buy shares at markedly less than he thinks they are worth, not just a little less. This is the concept of a margin of safety.
As well as applying it when it comes to valuation, Warren Buffett also maintains a margin of safety by diversifying his portfolio across a range of companies and industries. Even as a small private investor I can and do follow a similar principle of diversification.
Invest like Buffett
The Warren Buffett approach does not seem like rocket science – and that is the point.
Buffett is using a relatively simple set of proven investment principles. By doing the same, I hope to build a share portfolio that can help me get richer over time.
