Image source: The Motley Fool
Lots of people wake up one day and realise that they have not got the investment portfolio they want. In some cases, after decades of working, people have nothing invested at all. But it is never too late to start getting serious about building wealth. To do so, I draw lessons from the career of successful investors such as Warren Buffett.
Here are three lessons I would apply.
1. Investment takes money
Investment takes money. It is fine if I do not have money saved up already, but I will need to start putting some aside if I want to invest.
Despite being one of the world’s wealthiest people, Buffett is not extravagant. He has lived in the same house for decades.
Being aware of what one spends should make it easier to start saving money that can be used for investment.
2. Buy stakes in great businesses
Some people get into buying and selling shares purely based on how they expect the price to move in the short term.
But that is trading not investment. Buffett is an investor. Indeed, he has said his preferred holding time for shares is “forever”. He has owned shares in companies including American Express and Coca-Cola for many decades.
As an investor, Warren Buffett is very picky about what he buys. He only invests in businesses he understands. Otherwise, he could not properly assess their value. Without having an idea about a company’s valuation, I do not think it is possible to know whether its shares are attractively priced.
Buffett thinks like an owner, meaning that he sees shares as a small stake in a company. If he does not think a company is attractive, he would not buy shares in it. So he looks for what he sees as great businesses in which he can invest through the stock market.
What makes a great business? Buffett looks for long-term pricing power. That means a company has the ability to set its prices at a profitable level for years or decades to come. That might be because of its strong brand, like Apple, or a unique advantage such as a transport network no rival can copy.
3. Warren Buffett sticks to his guns
Buffett knows what he is looking for. So he does not buy shares he thinks are merely good. Instead he waits for the chance to invest in firms he reckons are great, even if that takes years.
At 40, I could be in a hurry to start investing — but I still think Buffett’s approach of waiting patiently for great businesses, not merely good ones, makes sense.
To illustrate, imagine at 40 I put £1,000 into shares that had a compound annual growth rate of 5% (for example, from dividends and share price growth) until I hit 65. I would then have an investment worth over £3,380.
But if I waited five years until I was 40 and then invested £1,000 in a company with twice the annual compound growth rate, at 65 my investment would be worth over £6,700 — even though I had waited five more years to invest.
At any age, like Buffett I would focus on finding really great investment opportunities! Investing in great businesses has been key to his success. They can be hard to find.