Warren Buffett was fortunate enough to be raised in a relatively well-off family. Yet his gargantuan wealth is almost entirely self-made. By taking a carefully calculated and disciplined approach to the stock market, he’s become one of the wealthiest men on the planet.
Many have tried replicating his success to little avail. That’s hardly surprising, considering achieving a 19.8% average annualised return over six decades is hardly a walk in the park.
However, by following his methods, investors can still end up far better off, even if they don’t achieve the same extraordinary returns. After all, even a 1% boost against the stock market average can have a monumental impact in the long run.
Stick to a circle of competence
There are many factors that can be attributed to Buffett’s success. But in my opinion, one of the most critical is the concept of a circle of competence.
Simply put, Buffett doesn’t invest in companies or industries that are outside his realm of understanding. Technology is a prime example of this. Despite the sector being a massive driver of growth for many investors, it’s only been in the last few years that Berkshire Hathaway’s portfolio began adding tech stocks into the mix. And even these weren’t picked by Buffett but rather by his colleagues.
To consistently beat the market, investors need to be capable of making informed decisions. And that can’t happen effectively if an investor starts putting money into businesses they don’t understand. Apart from making life harder in analysing an enterprise, it’s difficult to determine where the threats or opportunities reside.
In my case, fashion seems to be completely out of my wheelhouse. Given the complexity of modern financial institutions, I’m also not too fond of banks. Could I be missing out on terrific buying opportunities? Absolutely. But the stock market is vast, and there will always be new bargains in sectors I’m far more comfortable following, like healthcare and technology.
Patience is a virtue
Getting rich quickly is obviously desirable. But in almost all cases, it’s impossible to achieve without taking on absurd levels of risk. Buffett may have over $100bn in net worth today, but it’s taken a lifetime to accumulate. And the bulk of it only started to emerge after he turned 50.
Investing is a life-long endeavour and can demand tremendous patience. Even dirt cheap shares can take months or even years to reflect their true intrinsic value. And the temptation to veer off track can be immense if other investors are seemingly making a fortune in other shares.
The fear of missing out is a powerful emotional response that’s pretty hard to overcome. Buffett’s ability to wait for as long as it takes has served him well. And investors looking to start building wealth in the stock market should strive to do the same.
The post Nothing in the bank? I’d use Warren Buffett’s approach to start building wealth appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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