Warren Buffett’s one of the most successful investors in the world building a fortune worth just shy of $140bn as of June. Almost all of this wealth originated from making smart investing decisions. And that’s why he serves as a terrific example for others who are looking to build wealth, even for those who are starting from scratch.
So how did he do it? And how can investors today follow in his footsteps? Let’s explore.
Focus on the future
A common mistake most beginner investors make is easily getting spooked by volatility. The stock market can be a chaotic place in the short term as prices shift based on mood and momentum. As a result, it’s not unusual for even the best businesses in the world to experience massive drops from time to time.
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Amazon, Apple, Microsoft, and Nvidia are four of the largest enterprises in the world today. And those who invested early on, even with a small sum, are now sitting on a massive pile of money. Yet the journey hasn’t been smooth. Each business has suffered massive declines along the way, dropping by more than 80% on some occasions. Whether it be from a stock market crash or a prolonged cyclical downturn.
Buffett’s fully aware of the impact short-term challenges can have on companies. Yet instead of panic-selling like most investors, he’s often rushing to buy at a discount.
Obviously, that doesn’t mean every company that’s falling from grace is a guaranteed winner. In many cases, they won’t be. But the stock market has a tendency to overreact resulting in potentially lucrative long-term buying opportunities among wonderful companies.
As Buffett’s late investing partner, Charlie Munger, said: “If you can’t stomach 50% declines in your investment, you will get the mediocre returns you deserve”. In other words, investors seeking to build wealth have to have the conviction to hold onto quality businesses through both the ups and the downs.
Example from Buffett’s portfolio
Buffett’s investment vehicle, Berkshire Hathaway, has quite a few businesses in its portfolio. But one that’s endured a particularly bad run lately is Snowflake (NYSE:SNOW).
The firm operates with a fairly new type of business model where customers pay based on usage rather than typical subscription fees. This drastically lowers the barriers to entry for smaller businesses but also gives larger enterprises more flexibility in managing costs.
And since the company’s also a specialist in helping run artificial intelligence (AI) machine-learning workloads, the company’s managing to stand out against industry titans like Microsoft Azure and AWS.
However, Snowflake’s having a globe-like shake-up in management with the long-time CEO stepping down. This came paired with a significant decline in growth and a security breach in April this year. Consequently, the stock’s down over 60% since the start of 2022, and 31% year to date.
Yet despite all this volatility, Buffett hasn’t sold a single share. He’s following his own advice and focusing on the long-term potential of this enterprise.
