The Motley Fool

3 strategies I think helped Warren Buffett become a multi-billionaire

While many investors focus on Warren Buffett’s track record of outperforming the S&P 500, this is only one reason for his investment success.

Certainly, being able to beat the index on a consistent basis has made a major impact on his financial standing. But his ability to always live within his means (notwithstanding the fact that nowadays, his means are more than almost anyone else globally), invest the majority of his excess capital and consider every investment thoroughly, rather than adopting a scattergun approach, have all been major contributors to his multi-billionaire status.

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Living within his means

Warren Buffett has never been a big spender. Whether in his younger years, or once he had become a billionaire, he has never been interested in buying big houses, expensive cars or any other trappings of wealth that are often pursued by millionaires or billionaires. Instead, he has lived in the same home for decades, and drives a very modest saloon car.

Living within his means has provided Buffett with excess capital. If he had spent all he earned throughout his life, he would probably not have been able to invest in many of the companies he has purchased. As such, no matter what salary an individual earns, it is imperative to spend less than the amount earned. Doing so provides the opportunity to make money from investing, without which there would have been no billions for Buffett.

Invest, invest, invest

While Warren Buffett is known to keep a large amount of cash on hand in case there are buying opportunities on offer, he invests a large proportion of his wealth in the stock market. He has never bothered trying to become a real estate mogul, nor has he sought to invest in alternative investments.

There is good reason for this. There is no other mainstream asset which offers the track record of growth (as well as the consistency of always recovering from challenging periods of performance) as the stock market. The amount of data, information and regulation that is present within the stock market is unrivalled, with other asset classes such as buy-to-lets and peer-to-peer lending falling short in many of these areas.

As a result of investing significantly in the stock market, Buffett has been able to capitalise on its growth rate. Certainly, he has consistently outperformed the index, but the mere fact that he has been so involved in what has been a rising price level for the S&P 500 over a long time period shows that he would still be very wealthy even if he had generated returns that were in line with the wider index.

Carefully considered decisions

Buffett has stated that every investor should have a maximum of 20 decisions when it comes to investing throughout their lifetime. This, he believes, would concentrate investors’ minds, and cause them to carefully consider every decision they make. It would avoid a scattergun approach, where investors try out various industries, regions and types of company as they seek to diversify and access growth in a variety of areas.

While concentration risk may be present in Buffett’s scenario, it may also mean that investors take their time and really seek only the very best investment opportunities available.

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