When it comes to building wealth – especially in the stock market – nobody knows more than Warren Buffett. And the Berkshire Hathaway CEO has some advice I think will be important in 2024.
Over the last week or so, positive macroeconomic news has been sending share prices higher. But I think investors would do well to listen to two pieces of advice from someone who has seen it all before.
Buy low
This is where Buffett’s first piece of advice comes in: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
I think this is going to be especially important in 2024. In a bull market, with share prices going up, it’s easy to buy a stock just because it seems to keep going up in the hope of building wealth.
This is risky though. Nothing is certain about interest rate cuts in 2024 and neither the UK nor the US has reached the inflation targets set out by central banks.
That means there’s a chance prices might come down at any point, making it hard to sell for a profit. And if that’s how I plan to make money when I buy a stock, then I’m going to be in trouble.
The alternative is to buy shares for less than their intrinsic value. That way, investors like me don’t have to rely on getting an inflated price to realise a profit by selling.
Stick to what you know
There’s a second principle that I think will be no less important in a year where artificial intelligence (AI) stocks are likely to get a lot of attention.
As Buffett puts it: “Risk comes from not knowing what you’re doing.”
When it comes to investing – especially for building wealth – it’s easy to think the way to go is to work out what the next big development will be and try to get ahead of it. But this can be dangerous.
I’m a believer in the AI movement – I don’t think it’s just a passing fad. It’s hard to think this after seeing the investments Microsoft and Alphabet have been making in the sector.
Nonetheless, it would be a mistake to think I ought to go out and buy shares in an AI company. Since I’m not a computer scientist, I don’t know what to look for, making it risky for me.
Buffett has built wealth by investing in straightforward businesses – the value of Berkshire’s Coca-Cola investment has gone from $1.3bn to $25bn. I think this will be crucial in 2024.
Investing in 2024
It looks like investors are expecting a good year for the stock market in 2024. And the more they expect this, the more share prices go up.
In these kind of conditions though, I think it’s important to follow the advice Buffett sets out. Sticking to businesses I can understand and buying them at decent prices is going to be the key.
