Retirement doesn’t seem to be on Warren Buffett’s mind. After all, the legendary billionaire investor continues to steer the ship at Berkshire Hathaway even at the age of 92!
And yet, by applying his investing strategies, investors could put themselves on a path to financial freedom as well as a comfortable, and perhaps even an early retirement.
With that in mind, here are three tips from the ‘Oracle of Omaha’ to help build wealth.
1. Stay within a circle of competence
Despite the tremendous success of the technology sector over the last two decades, Buffett has never bought any tech stocks. Even the few in Berkshire’s portfolio today weren’t selected by him, but rather by other members of his team. Why?
It’s simple. He won’t invest in businesses he doesn’t understand. Companies and industries can be complex ecosystems. And in some cases, analysing these opportunities requires expert knowledge that’s not easily obtained.
Buffett has repeatedly said: “Rule number 1: never lose money. Rule number 2: don’t forget rule number 1.” As such, if he deems an investment too complex to fully understand, he just moves on.
Overcoming the fear of missing out is challenging, especially when other investors are seemingly thriving. But investors sticking to sectors within their circle of competence significantly reduces the risk of making costly mistakes. And thanks to the diverse nature of the stock market, there will always be new opportunities.
2. Pay a fair price with a margin of safety
Buffett is a long-term value investor constantly looking for high-quality enterprises to buy and hold. However, he’ll only pull the trigger if the price is right. Why? Because even the best businesses in the world can be mediocre investments if the wrong price is paid.
Determining a company’s intrinsic value is not a simple task. And even professionals struggle with the process. Relative valuation metrics like the price-to-earning or price-to-book ratios can provide quick insight. But Buffett and his team use a more advanced technique, namely discounted cash flow models.
This approach requires a detailed understanding of the underlying business and its revenue stream, pointing back to the importance of staying within a circle of competence. But even the most thoughtful forecast is riddled with uncertainty. And this is where the margin of safety steps in.
After estimating the fair value of a stock, Buffett reduces it even further by a margin of safety which reflects his confidence level. And only when a top-notch business trading below this pessimistic level will he add shares to Berkshire’s portfolio.
3. Focus on the long term
American economist Benjamin Graham once said: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine”. And it’s a principle that Buffett applies to all his investments. Popularity and momentum rule in the short term. But in the long run, successful investments are determined by successful businesses.
By focusing on the long-term potential of an enterprise rather than getting caught up in short-term bursts of excitement or disappointment, investors can greatly amplify their returns on the path to retiring richer.