3 Principles About Building Wealth That Can Be Learned From Warren Buffett

Warren Buffett is one of the legends of investing. I often read books about him watch his interviews on television as I try to learn as much as possible about his investing style. I respect the fact that Buffett knows a lot about what it takes to make money investing.

The Race Is Not Given To The Swift

It is not the fly by night investor that wins race but the patient investor. Investing is an art and like any good work of art, it takes time to see results. Don’t judge your investment’s performance over 1 month or 3 month time period. Judge your portfolio’s performance on a 5 year basis. Sometimes it can take a two to three years to see an investment strategy start to play out.

For example, Buffett’s investments in General Electric and Goldman Sachs looked foolish to the public in 2008. He even wrote an op ed piece urging investors to buy American customers. Buffett was mocked for his assertion. Fast forward to 2011 and Buffett has raked in billions of dollars with his bold calls. I would bet that Buffett’s bets will make him even more money over the next few years.

The Early Bird Catches The Worm

If you wait for the general public to endorse your investment decisions, you will miss the best opportunities for investing. Buffett is often a contrarian investor. He will invest in sectors when things seem to look the best for him. More often than not, these decisions work for him. Occasionally, these decisions have worked against him(like his investment in GE).

You can often make money investing by being one of the earliest investors in a sector. What would your returns have been if you invested in the tech sector or the financial sector during the market crash of 2008 to 2009? Great investors like Buffett are often willing to take calculated risks as long as they have a solid expectation of profit.

Keep It Simple Stupid

Investing in stocks doesn’t have to be anything like organic chemistry. Investors often make investing way more complicated than it has to be by investing in companies with complex business models. There were millions of investors in Enron who had no idea that Enron’s paper profits were derived from complex schemes and not selling energy itself.

Buffett only invests in companies that have business models that are easy to understand. It’s easy to tell how companies like Apple, Target, and Hershey’s make their money. There are a lot of small and mid cap biotechnology companies that are “hot stocks’ that investors buy despite the fact that they have no idea how they make their money.

Comments

  1. There are quite a few people out there that just assume they could never be like Warren Buffett; they wouldn’t be able to spot a company that was undervalued. I really tend to disagree. Warren is a very intelligent man, but he really does keep his investing very simple. I’m going to continue to study his practices, and I believe that I can soon have success in the market as well.

  2. avatar Moneycone says:

    Though I’m a fan of Buffet, I’ll say “Buffet only invests in companies that have business models that are easy to understand.” and ” Buffett’s investments in Goldman Sachs” are contradictory.

    GS’s business model is anything but simple not to mention shady (they did pay up a hefty fine to the SEC).

    • avatar Mark says:

      MoneyCone I think the only thing difficult about determining Goldman’s revenue stream is its black box trading method. I assume that Buffett was given some access to their unique methods for his billions in capital.

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