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When it comes to building wealth throughout life, few have done as well as Warren Buffett. The self-made billionaire has prospered thanks to his focus on identifying brilliant investments that he can buy and hold for the long term.
Buffett is transparent about many of his investment decision-making processes. That means someone like me can learn from it and choose to apply some of the lessons to my own stock buying decisions.
Focus on wealth creation.
Can you really hope to build wealth by investing a modest amount like £20 a week? I think the answer is yes.
Buffett started small. When he was a student, he invested his savings in three shares of a company. Clearly, he eventually had much larger amounts at his disposal, but I think the principle holds. He starts small to accumulate wealth over time by saving regularly and making smart investment decisions.
I think it is essential to keep in mind along the way that the objective is to generate wealth. That can rule out options that seem potentially lucrative but are also very risky. As Buffett says about investing: “Rule number one: never lose money. Rule number two: never forget rule number one.”
Take a long-term approach
Many of the businesses in Buffett’s portfolio could easily have existed a century ago, and many of them did. From railways to banks and soft drinks like Coca Cola to the producer of baked beans kraftheinzmany of Buffett’s choices have stood the test of time.
I think many of them will be here another century from now.
Buffett tries not to invest in companies just because they had a great past. In fact, some of his biggest self-confessed mistakes have been just that, like when he invested in shoe and clothing companies whose best days were behind him.
Look for a company with a business model that you think can work well in the future. Many of these companies have already done well in the past and can continue to do so, thanks to a competitive advantage in a market with enduring appeal to customers. When investing, like Buffett, I always focus on a company’s long-term prospects before considering buying its stock.
keep things simple
Companies like Coca-Cola illustrate another facet of how Buffett invests. He tends to keep things simple.
That means you don’t invest in any industry you don’t understand. You don’t buy a company if its financial reports aren’t clear enough for you to understand. He limits himself to a few business areas in which he has gained a great deal of experience, and often owns shares for many years, or even decades.
You also reduce the risk of a bad investment wiping out your portfolio by diversifying into a variety of positions.
It can be easy to think that successful investing must be a complicated pursuit, or else more people would do it. In fact, Buffett has shown that he likes to keep things as simple as possible.
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