8 Everyday Ways Warren Buffett Says You Can Grow Your Wealth Through Investments
Written by
David Nadelle
Edited by
Cory Dudak
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At 93, you would be right to assume that Warren Buffett, the fifth richest person in the world, has several hard and fast rules when it comes to investing to build wealth. Buffett points to a handful of fundamentals, or rules of investing, that have served “The Oracle of Omaha” very well for decades.
Investors heed the advice of the chairman and CEO of Berkshire Hathaway because he’s succinct, engaging and easy to understand. Above everything, Buffett applies everyday philosophies to his strategic investment planning, preaching consistency and patience to never lose money.
Here are eight steady and regular ways Buffett grows his investment wealth:
1. The Long Haul
Buffett advocates holding investments for the long term, allowing them to grow and compound over time. Bill Gates, writing for Harvard Business Review years ago, said that despite opportunities to sell companies when their stock prices seemingly hit their peaks, his friend “just won’t sell their stock no matter what the price is.”
“I think his reluctance to sell is more philosophical than optimization driven, but who am I to second-guess the world’s most successful investor?” said Gates. Warren’s general unwillingness to sell is based on placing importance on value growth over time.
2. Focus on Value Investing
Buffett’s years of value-oriented investing has earned him the reputation as the greatest investor of our generation. Value investing, which involves buying undervalued stocks or assets with the potential for future growth, isn’t accomplished through guesswork, but rather by accurately judging companies with strong fundamentals and a competitive advantage. To quote Buffett: “Price is what you pay, value is what you get.”
3. Understand Your Investments
Buffett suggests investing in companies or industries you understand well by thoroughly researching and analyzing the businesses you plan to invest in to make informed decisions. Like Buffett, investors should continue to learn and educate themselves about the businesses they’re invested in, and avoid speculative investments in unfamiliar companies or markets.
4. Practice Consistency and Patience
As mentioned above, consistency in investing and patience are key components of Buffett’s approach. He advises sticking to a well-defined investment strategy and resisting the urge to make impulsive decisions based on short-term market fluctuations.
5. Buy Quality
Buffett looks for companies with a durable competitive advantage, strong management, predictable earnings and a history of consistent growth, like Apple, Coca-Cola and American Express. As Business Insider notes, Buffett invests in high-quality businesses that have a long-term sustainable advantage and considers a “company’s pricing power, global reach, brand appeal, dominance over its competitors, and big profit margins as some of the ‘quality’ criteria that can justify a higher valuation.”
6. Set a Margin of Safety
Buffett believes strongly in margin of safety investing — buying assets at a price significantly below their intrinsic value. This provides a buffer against potential losses and increases the likelihood of higher returns. According to LiberatedStockTrader.com, in estimating a stock’s risk and profit potential, Buffett “likes a margin of safety of over 30%, meaning the stock price could drop by 30%, and he would still not lose money.
7. Avoid Overtrading
Buffett advises against excessive trading — which can incur unnecessary transaction costs and taxes — preferring to buy-and-hold rather than frequent buying and selling, or “flitting from flower to flower.” Many investors, including successful venture capitalist Jim O’Shaughnessy, support Buffett’s wait-and-see approach.
Posting to Twitter in 2018, O’Shaughnessy said, “Often in investing, the best thing to do is nothing. But if you can simply remain dispassionate about all the emotionally charged things happening around you day-to-day, you will come out ahead of virtually everyone else in the long-term.”
8. Reinvest Dividends
Reinvesting dividends from your investments can help compound your wealth over time. As The Motley Fool tells us, Berkshire Hathaway doesn’t pay dividends to its shareholders, but that doesn’t mean that Buffett and company haven’t benefitted exceptionally well from owning dividend stocks or using dividend reinvestment programs (DRIPs) to put earnings back into paying stocks.
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