I’d use these 5 Warren Buffett approaches to build wealth

Christopher Ruane outlines a handful of investing lessons from billionaire Warren Buffett that he thinks can help a small investor like him.

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Warren Buffett at a Berkshire Hathaway AGM

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Billionaire investor Warren Buffett has had a very successful career in the stock market. Most people may never create anywhere near as much wealth as Buffett, but that does not mean we cannot still learn useful, practical lessons from him.

Here is a handful of helpful hints from his career I hope can improve my own stock market performance.

1. Be clear about objectives

Buffett knows what he wants and acts on that basis. That helps him stay focussed on the prize and act in a rational level-headed manner.

For example, he has never tried to get rich overnight but instead has taken a long-term approach that emphasises considered decision making, measured risk management and realistic expectations about what any given business might be able to achieve.

2. Stick to what you know

Buffett has repeatedly discussed the importance of sticking to his “circle of competence” when he invests. I think his investment in Coca-Cola (NYSE:KO) demonstrates that. He has been consuming its products for decades and sat on its board for many years.

Why does sticking to what you know matter? It makes it easier to assess the potential value of an investment and whether a share price might be a bargain. Putting money into something you do not understand is not investment, but speculation.

3. Look at end market size

Coca-Cola has a lot going for it as a business. One of those things is that demand for soft drinks of one type or another is likely to remain high for decades to come.

From an investing perspective, that matters, because for a company to do well it helps to be addressing a large potential market. From Bank of America to Apple, Buffett’s share portfolio is stuffed with businesses that benefit from large market sizes.

4. Standing out from the crowd

But Coca-Cola is not the only soft drinks available. It is a crowded marketplace. Coca-Cola does well partly because it first identified a large market, then found ways to set itself apart from potential competitors. Those include distinctive branding, proprietary product formulas and a distribution network that spans the globe.

Having a competitive advantage can help give a company pricing power, driving profits.

Buffett has made billions of dollars thanks in part to spotting companies with strong pricing power. Many such companies, like Coca-Cola and Apple, are there in plain sight. Doing well in the stock market, as Buffett’s portfolio shows, does not have to mean investing in small or little-known enterprises.

5. Keeping the portfolio diversified

But while Buffett has held Coca-Cola shares for decades, earning billions of pounds in dividends along the way, he has never poured most of his money into that one share.

As a seasoned investor, Buffett knows that even great companies can sometimes run into unexpected difficulties. A sudden surge in ingredient or packaging prices is an ongoing risk for Coca-Cola’s profit margins, for example.

So Buffett keeps his portfolio diversified across a range of different shares. Even as a private investor with limited means, I do the same.

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.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. 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.

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