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One of the most successful investors of all time dropped some wisdom.
At their annual meetings, Berkshire Hathaway’s shareholders have the opportunity to pick CEO Warren Buffett’s brain on any number of topics.
However, one investor who attended the conference in 1999 cut right to the chase. “Mr. Buffett, how do I make $30 billion?” he asked.
As always, the Oracle of Omaha conveyed complicated theories in simple terms. Here are the three crucial rules that helped the 93-year-old accumulate a massive fortune and could help ordinary investors too.
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Start young
Buffett’s best advice for investors is to get started as early as possible. He has a simple metaphor to explain his wealth-building strategy. “We started with a little snowball on top of a very tall hill,” he said. “We started at a very early age in rolling the snowball down, and of course, the nature of compound interest is that it behaves like a snowball.”
Indeed, the length of Buffett’s career is a key piece of his enormous wealth. He bought his first stock at the age of 11. He’s now 93 years old and still actively investing. In fact, the majority of Buffett’s wealth was accumulated after he turned 65. In 1999, his net worth was just $30 billion. Today, it’s jumped by over 450% to $141.1 billion, according to Forbes.
Staying invested over a long period of time is crucial. Ordinary investors can best harness the power of compounding by starting as early as possible. A great way to get a foothold on your investing strategy is with Acorns, an automated savings and investment app that makes your spare change go to work for you.
When you make a purchase on your credit or debit card, Acorns automatically rounds up the price to the nearest dollar and places the excess into a smart investment portfolio. This way, even the most essential spending translates to money saved for the future.
If you’re looking to build an emergency savings fund, a high yield savings account is the place to begin.
We’ve compiled a list of the Best High-Yield Savings Accounts of 2024 so you can have a streamlined look at what high-yield savings account is best for your savings to grow over time.
Circle of competency
Tom Watson Sr., the founder of IBM (NYSE:IBM), once said, “I’m no genius. I’m smart in spots — but I stay around those spots.” That’s the mantra Buffett has applied to his investing too.
Warren Buffett also pointed out that investing is risky, and risk comes from not knowing what you are doing. So be realistic in defining your circle of competence.
Buffett has mitigated that risk by sticking to industries he understands. Much of his portfolio is focused on either simple consumer businesses or financial companies.
Ordinary investors can similarly reduce risk by avoiding stocks in businesses that are too complex to analyze and evaluate. Stick to your circle of competency and don’t speculate.
Ordinary investors can similarly reduce risk by avoiding stocks or businesses that are too complex to analyze and evaluate. Stick to your circle of competency and don’t speculate.
If you want to expand your circle of competency, you may want to seek advice from a trusted professional. Finding a financial advisor that suits your specific needs and financial goals is simple with Vanguard.
Vanguard’s hybrid advisory system combines advice from professional advisers and automated portfolio management to make sure your investments are working to achieve your financial goals.
With a minimum portfolio size of $50,000, this service is best for clients who already have a nest egg built up but are ready to grow their wealth with a variety of different investments.
All you have to do is set up a consultation with a Vanguard advisor, and they will help you set a tailored plan and stick to it.
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Search for small companies
Buffett said that if he were starting again today with $10,000, he would focus first on small businesses. “I probably would be focusing on smaller companies because I would be working with smaller sums, and there’s more chance that something is overlooked in that arena,” he said at the shareholder meeting.
In his early days, the billionaire investor focused on extremely small companies that would be considered small-caps. He bought a tiny furniture company in Nebraska in 1983 when it was still expanding across state lines. He acquired See’s Candies when it made just $4 million in annual profits in 1972.
These small businesses were overlooked and had more room to grow. That means Buffett had a chance to buy them cheap and watch them expand. This is also true now. Small-cap stocks were roughly 30% cheaper than large-cap ones in the final quarter of 2023, according to analysis by BNP Paribas. They have also historically outperformed large caps, especially after recessions and over longer periods of time, says MSCI.
It’s advisable to diversify and add some small caps to your portfolio.
This strategy has paid off for Warren Buffet over the years. In 1979, the book value per share of his company, Berkshire Hathaway, was $335 according to Macrotrends. By August 19, 2024, it hit an all-time high price of $672,940.
You may not be able to match such spectacular returns. But you too can start investing yourself using a set-it-and-forget-it approach with Wealthfront.
This automated investing platform builds you a personalized portfolio of low-cost index funds from up to 17 global asset classes tailored to your risk profile and financial goals. .
To get started, simply answer a few questions. Wealthfront can then help you craft a diversified portfolio spanning a range of assets — from stocks, ETFs and bonds to real estate.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
