Warren Buffett’s one of the most successful investors alive today. His long-term-focused investing style has helped him build a massive personal fortune worth over $100bn. Yet, what’s often overlooked is that the vast majority of it came after he turned 50 years old.
This achievement proves two things. Firstly, it’s always better to start as soon as possible. And secondly, it serves as evidence that investors can still build significant wealth even later in life. That’s why investors in their 30s may want to take note of Buffett’s strategies and tactics.
Focus on finding only the best ideas
There are tens of thousands of companies listed on stock exchanges all over the globe. That gives investors a pretty long list of potential opportunities. But despite the vast amount of choice, most of these enterprises will fail to deliver meaningful returns. In fact, only a small selection could prove capable of beating the market.
That’s why Buffett never settles for mediocrity. A company has to have exceptionally compelling prospects and even then, they may fail to make the final cut. He calls this the ’20-slot rule’. Investors should act as if they can only buy 20 stocks for the rest of their life. That way, a lot of thought and care goes into which companies are worth buying and holding for decades to come.
The circle of competence
The stock market’s full of temptations. Right now, artificial intelligence (AI) stocks seem to be the latest trend with many seeing their valuations skyrocket on untapped potential. There’s no denying AI is already having a profound impact across many industries. Yet, a lot of these businesses can be a bit difficult to understand after looking past the eye-popping growth figures.
Buffett has a bit of a reputation for being skeptical when it comes to technology stocks. That has caused him to miss out on tremendous growth over the last two decades. But it’s also enabled him to avoid falling into countless traps along the way.
Simply put, investors should avoid companies they struggle to understand. Without the right knowledge, it’s almost impossible to identify threats and risks before it’s too late or properly value an opportunity.
Understanding risk
Boring is often best. Stocks that don’t get a lot of attention from trend chasers typically trade at far more reasonable valuations. And this lack of attention also causes tremendous growth or income opportunities to fly under the radar. However, not every investment will always work out.
Take Tesco (LSE:TSCO) as an example. The UK’s biggest supermarket chain was once part of Buffett’s Berkshire Hathaway portfolio (just under a decade ago). In fact, he was the third largest shareholder after opening the position in 2006 and topping it up in 2012. Yet, despite the early success of the investment, it quickly turned into a nightmare.
Increasingly questionable decision-making from management resulted in a series of profit warnings and even an accounting scandal. The result was a seemingly good investment, mutating into one of the biggest losses in Buffett’s track record.
Since then, Tesco’s undergone a management overhaul that has steadily turned the company around. But the stock has yet to fully recover. And it perfectly highlights the importance of diversification to protect from unforeseen portfolio calamities.
