Warren Buffett is easily one of the most famous investors in the world. He has made over a hundred billion dollars in the stock market by simply making smart investment decisions and remaining focused on the long run. While many have tried to replicate his success, few have come close to this legacy.
Striving for near-20% annualised returns is an exceptional challenge. However, adopting his mantra can still push investors to improve the performance of their portfolios. Even if these efforts only translate into a couple extra percentage points each year, that can still have a monumental impact on long-term wealth, thanks to compounding.
That’s why I believe those with little to no savings in 2024 could have much to gain by following in Buffett’s footsteps.
Keep things simple
The stock market is a vast playground with companies operating in a wide range of industries, each with its own risks and rewards. But while it may be tempting to chase after the most promising biotech breakthrough or revolutionary technology, this can potentially be a mistake.
All too often investors, even professionals, get caught up in the hype of a groundbreaking discovery. And it usually results in rash decision-making, buying or selling shares without having a well-researched thesis.
Needless to say, making uninformed decisions in the stock market seldom ends well. That’s why Buffett has religiously only invested in businesses he can easily understand. He calls it his ‘circle of competence’. And while this does mean a lot of money can be left on the table, taking this disciplined approach can steer investors clear of falling into any wealth-destroying traps.
Patience is a virtue
Investing is a lifelong pursuit. After all, stocks ultimately represent and move in line with the underlying business. And corporations often need years to develop, grow, and deploy their strategies. But even if Buffett finds a fantastic corporation that looks primed to thrive for decades to come, he often continues to show restraint.
That’s because regardless of how fantastic a company might be, it could still turn into a terrible investment if the wrong price is paid. Overpaying for a wonderful company can be just as problematic as investing in a mediocre one. That’s why Buffett spends significant time in the world of corporate valuation.
Determining a fair price for a business isn’t always easy. Discounted cash flow models can be challenging to build while relying on metrics like the price-to-earnings (P/E) ratio can be unreliable. However, it’s a critical stage in the stock-picking process.
What can be quite frustrating is spending countless hours investigating and valuing a company only to discover the share price is far too high. And it may be tempting to just ignore the results and snap up shares regardless. However, succumbing to the fear of missing out is a critical error that Buffett has a knack for avoiding.
If he discovers an excellent business worth buying but trading at too high of a premium, he’ll happily wait for the share price to either come down or the business to justify its lofty price tag – even if it takes years.
