Having built a fortune of $80bn by investing, Warren Buffett knows a thing or two about how to make money from stocks.
And unlike many other fund managers, traders and investors, Buffett has built his fortune using a relatively simple strategy. He likes to buy good quality stocks at low prices and hold on to them for decades.
Look to the long term
Buffett’s long-term outlook is probably his most significant advantage over the rest of the market.
While other investors are focused on what might happen over the next five-or-10-year period, Warren Buffett is focused on what might happen 20, 30 or 40 years from now. As he once described, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
By thinking many decades ahead, Buffett has been able to beat the market as he is not chasing investment trends or fads. He has been able to avoid taking any significant losses in the biggest market crashes of the past five decades because he only invests in companies that he believes will be around for the rest of his life, so he doesn’t need to worry if they have one or two bad years.
Time is your best friend
Buffett is also keenly aware of the fact that time is the investors’ best friend. The concept of compounding has been at the forefront of his investment strategy ever since he began investing at the age of 18. And it should be the same for every investor.
To give a short example, if you invest £250 a month every year for 50 years, if you can earn 7.5% a year on your investments. At the end of this period you’ll have an final pot of £1.6m.
Don’t lose money
So, if you want to make a million from stocks, it really pays to follow Warren Buffett’s example and invest with a multi-decade outlook. It’s also essential to focus on risk. If you can achieve a high single or double-digit return every year, the one thing that will derail your journey to £1m is a significant loss.
Warren Buffett has always (and will continue to) only invest in stocks where the risk of a total capital loss is zero. If you want to make a million, it’s vital you do the same.
Putting it altogether
Added together, these three investment tips listed above can be a powerful combination. You don’t need to be a genius or investment guru to be able to make a million in the stock market. All you need to do is follow Warren Buffett’s example by investing for the long term, using time to your advantage, and avoiding any situations where you may lose all of your investment.
If you follow these steps, as the numbers above show, it is simple to make a million from stocks. Even if you don’t have 50 years to save and invest, you can hit this goal. Putting aside £500 a month will grow into £1m after 35 years, assuming an annual rate of return of 7.5%.
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Rupert Hargreaves owns no share 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.