You don’t need to be a financial expert to know Warren Buffett has figured out how to build wealth through investing. Known for his legendary financial success and timeless investing wisdom, Buffett’s insights have guided countless investors to build their own fortunes.
However, you, too, can apply Buffett’s investing advice to build wealth. It still won’t be easy, but learning from Buffett’s decades of experience is invaluable to increase your odds of financial success. Here are investment gems straight from the financial oracle of Omaha himself. Use these tips to get one step closer to financial freedom.
1. Don’t Follow the Crowd
Simply put, if you’re following the crowd, you’re not investing. You’re speculating. Buffett advises investors to think twice before investing in a stock that’s getting a lot of attention from investors. Odds are that a stock is overvalued and only rising in price due to the hype. However, if the market is doubtful about a company, this may be your opportunity to find an undervalued stock.
Another way to think of this is by purchasing an item on sale versus full retail price. The 2008 market crisis is a great example illustrating a time when many were purchasing homes, most of which weren’t good investments.
2. Your Reputation Matters
Buffet mentions that it can take years to build your reputation, but you can lose it in minutes. Part of being an investor means you may work with others one day. However, no one will want to work with you if you don’t have a good reputation. You don’t have to work in Wall Street for this advice to be applicable.
For example, if you want to purchase a home but can’t get a loan, a family member or friend can temporarily help you. If you have a reputation for lying or not holding your word, you can bet not even family will want to help you.
3. Focus on Value, Not Price
Price and value are different, according to Buffet. For example, you can purchase an expensive stock that may plummet in value. Additionally, you can purchase a cheap stock that may skyrocket in value. The advice here is to focus on the value companies have and make your investment choices on this more than price.
4. Be Patient
We would all love to have invested in Facebook when it first went public in 2012 at $30 per share. As of April 2024, Facebook is worth over $500 per share. Buffett advises investors to be patient. Although you may be too late to invest in early Facebook, many companies are at their early stages. Do your research and be patient.
5. Hedge Against Risk
Although you can’t fully prevent yourself from losing money, Buffett advises investors to avoid losing at all costs. You can hedge against risk by investing in companies you believe in and being optimistic. For example, investing a large portion of your money in a new company most likely isn’t a smart way to hedge against risk. Should this company fail, most of your money will be gone.
6. Educate Yourself to Reduce Risk
Another way you can reduce your risk is by educating yourself. According to Buffett, risk comes from not understanding what you’re doing. Read books, listen to the news, and review company financial statements if you’re geeky. The more you understand a company and its direction, the better you’ll reduce your risk.
Think about it. The more you know about cooking, the more recipes you can make without errors. You can also apply the same logic to your investments.
7. Tough Times Reveal Your Capabilities
You won’t see how good an investor you are until times are rough. Buffett points out that everyone seems like a winner when things are good, but only a few continue to win when times are tough. During the 2008 financial crisis, many people panicked and lost a lot of money. However, during this same period, many investors purchased real estate, among other investments, for cheap.
8. Focus On Great Companies and Not Cheap Pricing
Buffett points out that purchasing a great investment at a fair price is better than purchasing an average investment for cheap. This means that no matter how cheap a stock is, it’s not worth purchasing if the company is only average. Instead, focus on finding great companies that deliver a lot of value for a fair price. Often, this may be the more expensive alternative in the short run, but your money has a greater chance of growing.
9. Hold as Long as Possible
Many investors look to make a quick profit. Consider what happened not too long ago with NFTs (non-fungible tokens.) Many investors fell in love with the new technology and invested a lot of money, hoping for a quick buck. Maybe a few lucked out, but most investors had to accept they’d lost their money. Instead of focusing on a quick return, aim to keep your investments for as long as possible.
10. Surround Yourself With People Better Than You
According to Jim Rohn, a motivational speaker, you are the average of the people you spend the most time with. Buffett also advises investors to surround themselves with people who are better than them.
Otherwise, how else will you grow? You can bet you’ll pick on these habits if you’re constantly around people who make smart investments and consistently build wealth.
11. Act Quickly on Opportunities
Isn’t it ironic that some investors are quick to jump on investments fueled by the hype but hesitate on practical opportunities that are likely to yield a high return? Buffett advises investors to act quickly when opportunities arise because they don’t know when they will happen again.
To find opportunities, you need to learn and save money constantly. Buffett most likely uses this logic to purchase his investments when they’re at a low price.
12. Focus on Index Funds
Unless you truly enjoy staring at multiple computer screens and monitoring company data, Buffet suggests most investors stick with index funds. You can still opt to purchase individual stocks from companies you believe in, but consider doing this sparingly. Otherwise, you’ll constantly compete against intelligent inventors with vast amounts of experience buying stocks.
An upside to investing with index funds is capturing the market’s average. Historically, expect to earn 10% annually with an index fund capturing the average of the S&P 500.
13. Focus on Results
Don’t fall prey to what fund managers promise you. They may have the latest tech and even beat the average S&P 500 return some years. However, calculating what you’re getting long-term will most likely average out to an index fund’s performance.
Buffet reminds investors that their actions shouldn’t calculate performance. Instead, what matters is results. The problem with mutual funds, other investments highly managed by fund managers, is that fees diminish their slightly higher returns.
14. Temperament Is More Important
According to Buffett, you don’t need to go to business school or have high intelligence to be a successful investor. However, you will need to have the discipline to manage your emotions. It may be tempting to withdraw all your money when an investment appears to have failed, but selling your investments only guarantees you’ve lost.
Instead, apply many of Buffet’s earlier tips, such as educating yourself and focusing on proven investments. It’s ok to feel scared, but if you’ve done your research and chosen to invest in a company that delivers value, your money will most likely grow over time.
15. Not Everything Will Be an Opportunity
One of the hardest parts of being an investor is having the discipline not to jump at every opportunity that comes your way. Buffett advises that it’s OK for investors to pass on investment opportunities. Take the time to carefully evaluate your opportunities and invest in the ones where you’re most likely to succeed.