Reaching a point in life with less savings than hoped can be disappointing. But in terms of building wealth, the example of legendary investor Warren Buffett shows that mighty oaks can come from, well, very little indeed.
Buffett started buying shares as a schoolboy with hard-earned pocket money from a paper round. His first purchase, all in one share, broke what would later be a key element of his approach. Diversification.
But, in the decades since, Buffett has been a huge investing success. By applying his approach, I would aim to build wealth in the stock market.
Boring can be rewarding
The first thing to note about Buffett’s success is how much of it has come from fairly boring industries, such as insurance and transportation.
Not only that, Buffett has done well investing in well-known, large companies such as Coca-Cola and Apple.
Rather than try to sniff out some small company in a little-known area, Buffett tends to stick to proven performers in areas he understands. That makes sense, as investing in something you do not understand and so cannot assess is not really investing – it is speculation.
Invest for the long term
As a long-term investor myself, another thing that strikes me about Buffett’s approach is that he invests with a similar timeframe.
In fact, he has said his preferred holding time for a share is “forever”. Although he has indeed held some shares for decades, he also sells some.
But I think the interesting point is that his time focus is a long one. That can help reduce the fees that come with constant buying and selling.
But it also, again, marks Buffett out as an investor not a speculator. By investing for a long time, he is able to benefit from years of good performance by a business if he has correctly identified it as having promising prospects.
Focusing ruthlessly on value
However, simply having good commercial prospects on its own does not make Buffett buy a company’s shares. He also considers price and tries to avoid paying more than what he sees as a fair price for a share.
Why? In short, even a brilliant business can make a terrible investment by paying too much for it. So Buffett only tries to buy when he thinks he finds a great company selling for less than it is worth.
That might not be often. That seems to suit Warren Buffett fine. Indeed, he can go for years without making a big share purchase. Again, that marks him out as an investor not a trader.
Applying the Buffett principles
Simply learning some investing lessons from Buffett might not give me his Midas touch. But I do think it could help me become a more effective investor.
So, even with no savings, starting to drip-feed some money regularly into a Stocks and Shares ISA and investing using some Buffett principles could hopefully help me build wealth.
