If you want to learn how to create wealth, then you could hardly do better than listen to the most successful investor of all time. Check out the simple strategies that Warren Buffet used to become one of the richest people in the world.
The Simple Secrets of Success
A while back, Warren Buffett had what you might think was a really bad week. Sudden drops in the price of IBM and Coca Cola shares wiped $2 billion off the value of the legendary investor’s stake in these companies.
Now if I had just lost $2 billion in a week, I would be pretty depressed about it. I bet you would, too. But the CEO of Berkshire Hathaway not only doesn’t care…he was actually quite pleased about the turn of events.
He said ‘We should wish for IBM’s stock price to languish throughout the five years.’ The logic here is that if the stock price drops, IBM shares will be even better value. So Berkshire Hathaway will be able to scoop up stock at bargain basement prices, then profit when the stock climbs back to its real value.
This is a great example of the long-term thinking that has enabled Buffett to build a fortune of over $60 billion. While most investors worry obsessively about the short-term ups and downs of the stocks they invest in, Buffett looks only at the real long-term value of the stocks he holds.
Now you might say that it’s easy to take such a view when you are rich enough to shrug off a $2 billion decline in your company’s assets. But Warren Buffett wasn’t always rich. He started investing with a modest fund that he begged and borrowed from friends and family. So what are the secrets that turned an ordinary kid from Omaha into one of the richest people in the world? Here are some of his top tips from over the years:
Let's distill the great investor's thoughts into some simple principles you can apply. Here are few of the secrets that have enabled Buffett to amass amazing wealth. Follow these principles, and you might become wealthy, too,
#1: Look for Undervalued Stocks
Buffett famously uses the value investing approach to selecting stocks. This means that he ignores what’s happening in the stock market in general, and focuses only on the fundamentals of the stock he is interested in.
He looks for stocks that are producing a high return on equity, whilst also increasing profit margins year by year. He only considers companies that have been around long enough to establish a clear track record, and prefers companies that are not saddled with high levels of debt.
Based on these factors, amongst others, he calculates the company’s real value and compares this with the current market capitalization (the total value of all the company’s stock at the current stock price). If the real value is at least 25% below the market capitalization, then there is a strong case to invest.
#2: Only Buy Stocks You Understand
Buffett has been criticized in the past for failing to invest in some of the most exciting hi-tech stocks, especially in the Internet sectors. His critics say he missed an opportunity to invest in booming stocks such as Google when they were still undervalued. But the flip side of this is that by sidestepping such stocks, Buffett also avoided being wiped out in the dot-com crash of 2000.
The point here is that the great man only invests in businesses that he understands. That way, he knows exactly what he is getting, and so can be as sure as possible of a good long-term result. He freely admits that he doesn’t fully understand what many hi-tech companies do, and so is unable to make sound investment decisions about such stocks. Avoiding picking losers is more important to him than picking every possible winner.
#3: Buy and Hold for the Long Term
We have already discussed how Berkshire Hathaway is able to shrug off a $2 billion hit to its asset values without worrying. This is simply because the company invests for the long-term through a simple ‘buy and hold’ strategy.
A temporary decline in the stock price means little to Buffett, because he has no intention of selling. He will still own the stock when its price roars back up in value, and when healthy dividends are paid out in the future.
#4: Re-invest Your Profits
Buffett got started in business by buying a pinball table with a friend to place in a barbershop. The pair re-invested the income from the machine into buying eight more machines and generate more income. As always, Buffett was thinking of the long-term result, and this strategic thinking has worked for him ever since.
#5: Live a Modest Life
Despite being worth many billions of dollars, Warren Buffett still lives a very simple life. He is famous for continuing to live in the modest house in Omaha that has been his home for decades, and for driving an inexpensive car to work. He is also notorious for watching small expenses, and cutting all unnecessary costs out of his business where he can.
Don't fall into the trap of trying to impress your neighbors. They are too busy trying to impress you to worry about what you have. Buy the things you need, and invest the rest to create even more income.
#6: Limit What You Borrow
The legendary investor has been outspoken about the dangers of credit card debt and borrowing too much money to buy expensive properties. As he shows by example, you don’t need a big house and a flashy car to be happy. Instead of borrowing money to spend on more stuff you don’t really need, pay down your debt and free up money to invest for income.
Finally, Remember That…
…money isn’t everything. Now in the latter stages of his life, Warren Buffett has learned a great deal over the years about what is truly important, and what achievement is really all about. He says:
"I tell college students, when you get to be my age you will be successful if the people who you hope to have love you, do love you."