With no savings at 40, I’d build wealth using Warren Buffett’s golden rules

Warren Buffett has always followed his two golden rules of investing to achieve the market-beating returns that made him a billionaire.

| More on:
Fans of Warren Buffett taking his photo

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s never too late to start an investing journey, and even those aged 40 with little-to-no savings can still build meaningful wealth by heeding the lessons of Warren Buffett.

After all, the billionaire has outperformed the stock market average by almost double since the 1960s. And those able to follow in his footsteps can turn even a modest sum into a substantial pension pot.

So what are the golden rules behind Buffett’s success? And how can everyday investors use them to bolster their own portfolio returns?

The secret sauce

In every investment decision Buffett’s made, he’s always had one objective in mind: “Rule number one, never lose money. Rule number two, never forget rule number one”.

While this may sound obvious, executing it isn’t exactly straightforward. In fact, there are multiple positions within his holding company Berkshire Hathaway’s (NYSE:BRK.B) portfolio currently in the red. Kraft Heinz is down 55%, based on its average buying price. Paramount Global has fallen 65%, and Liberty Latin America has dropped by a staggering 82%!

In other words, despite his expertise, Buffett has made mistakes over the years. And he’s even described his original investment in Berkshire Hathaway when it was still a textiles business as “the dumbest stock I ever bought”.

Yet, in spite of these errors, his other investments have more than made up for it. And a lot of this boils down to simply holding on when times were tough.

One of the largest positions in the Berkshire portfolio today is Coca-Cola. And while it’s one of the largest soft drink companies in the world today, that wasn’t always the case, with its shares dropping by double-digits and crashing on multiple occasions before reaching its current industry-leading status.

Investors who were spooked by short-term challenges ended up selling off a business primed to become a long-term titan. And by doing so, they locked in their losses, breaking one of Buffett’s major golden rules.

Knowing when to sell

With the ‘Oracle of Ohmaha’ almost always taking a long-term approach to his investments, he won’t allocate capital unless he’s happy to have it locked up for decades. This means short-term volatility and market risk have smaller weightings on decision-making, with investments determined almost entirely by the quality of the underlying business.

However, blindly holding underperforming companies can also be a major mistake. Companies thriving today won’t necessarily retain their leading status forever. Changes in strategy, long-term potential, or even financial health can compromise an investment thesis. And in these situations, it’s often better to bite the bullet.

In the case of Berkshire Hathaway, stocks like IBM, ExxonMobile, and Freddie Mac are some examples of when he decided to make an early exit even at a potential loss. Or, as Buffett puts it, “when your original thesis no longer applies, get out”.

Of course, there is a bit of a cheat code investors can use to benefit from Warren Buffett’s expertise. As a publically traded company, it’s possible to buy shares in Berkshire Hathaway, immediately receiving indirect exposure to the companies inside its portfolio as well as any potential future returns.

This obviously comes with unavoidable market risk and volatility. But considering the benefit of having Buffett in my corner, it’s a strategy that’s worth considering, in my opinion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »