Now that we are well into the new year, I have been thinking about my strategy to build wealth in 2024 and beyond. By using some lessons from the long and lucrative investing career of Warren Buffett, I hope I could improve my chances of stock market success markedly.
Looking beyond 2024
Buffett does not invest by looking only at what might happen in the coming year. He is the archetypal long-term investor, considering how a business may perform years and even decades from now before putting his money into it.
While I will be considering potential buying opportunities in 2024 for my portfolio, my focus as an investor will be on the longer-term prospects of the shares I buy.
A winning business model wins
Some investors spend a lot of time gazing into crystal balls. Buffett though, looks at a company’s business model and asks some fairly basic questions based on known facts.
Is there a large target market of customers? Does a company have some competitive advantage that can help set it apart? Does it have a business model that can be profitable?
This approach can be seen in the sorts of shares owned by Buffett, from Apple to Coca-Cola.
Other factors are also relevant, such as how much debt a company carries on its balance sheet.
But the key point Buffett looks at is whether a firm’s business model sets it up for long-term financial success. He is not interested in complex financial wizardry or business models that could do exceptionally well but rely on a specific set of market circumstances to work. He likes simple, proven and enduring ones.
Compounding builds wealth
Given how successful his company Berkshire Hathaway has been though, why does it not pay dividends?
The reason is that Buffett is a big believer in compounding. That basically means reinvesting earnings, whether in the form of dividends or capital gains.
He compares it to pushing a snowball downhill. As it goes, it picks up more snow that, in turn, picks up even more snow. In Buffett’s analogy, the snow represents money.
Choosing a few great moves
Buffett is a smart and experienced investor who also understands that no matter how great one company may seem, none of us knows the future. So he diversifies his portfolio across a range of different companies.
But he does not diversify by investing in hundreds of different shares. The Buffett method to stock market investment consists of trying to identify in a few great companies rather than lots of merely quite good ones.
By waiting for what seems like outstanding opportunities in the stock market rather than putting my money into shares that I think look merely decent, hopefully I can increase the chance of building wealth over 2024, and beyond.
