Over the course of Warren Buffett’s multi-decade investing career, he’s amassed wealth of over $110bn by making smart moves within the stock market. It’s why he’s often considered one of the best investors alive today.
Plenty of investors have tried to replicate his double-digit returns over the years, with most falling short. However, while achieving a near-20% annualised return is exceptionally difficult, using his tactics can still help investors boost their portfolio’s performance. And when leveraging the power of compounding, even a few extra percentage points can have an enormous difference in the long run.
With that in mind, here are the three most critical tips from Buffett that could set investors on a path to wealth.
1. Only invest in the best
Depictions of investors in financial news, films, and TV series often include a lot of shouting and constant buying and selling. While this is somewhat true when it comes to traders, it doesn’t even come close to how a long-term investor like Buffett operates.
When it comes to investing in businesses, most of the time is spent doing research. There are plenty of good ones for investors to pick on the London Stock Exchange. However, for those searching for Buffett-style market-beating returns, ‘good’ doesn’t cut it. He wants the best. And finding these top-notch enterprises takes a lot of time.
Even if an investor discovers a top-notch enterprise, it could take years or even decades before a fair price emerges. And Buffett is more than happy to wait. But he also acknowledges that investors will only stumble upon a few of these opportunities throughout their investing journey. And so, in the words of the ‘Oracle of Omaha’, “you’ve really got to grab them when they come”.
2. Follow the two most important rules
“The first rule of an investment is don’t lose. The second rule of an investment is don’t forget the first rule”. This may seem obvious, but not every investment is going to live up to expectations. Even Buffett has made plenty of bad investments over the years, including Berkshire Hathaway when it was still a textiles business.
However, these rules contain a lot of wisdom when it comes to risk management. The fear of missing out can easily lead investors to inadvertently go beyond their personal risk tolerances. After all, the prospect of explosive gains can lead even professionals astray.
Every business has a weakness of some sort. As such, every investment carries risk. To follow these golden rules, investors must find out what the threats are before allocating any capital. In most cases, massive growth opportunities come paired with substantial risks that can turn investing into speculating. But every once in a while, there’s an exception. And these are the stocks that Buffett is looking for.
3. Everyone has their limits
The third piece of advice Buffett has given time and time again is for investors to stay within their circle of competence. Companies and industries can be complicated. And if Buffett doesn’t easily understand a particular investment, he won’t touch it, regardless of the potential gains it might offer.
Without understanding, there can be no valuable insight to make an informed decision. And that once again leads investors down the path of pure speculation – a critical error that many novice investors make.