Legendary investor Warren Buffett has a lot to say on how people can improve their chances of investment success. Here are seven of his simple nuggets of wisdom I think could help me retire rich.
1. A few big choices
A lot of people spend their lives working very hard to try and retire rich. They juggle multiple jobs, try side hustles, and pile up all manner of investments with the hope of building a sizeable nest egg. But sometimes too much activity can hurt, not help, investing results.
Warren Buffett is an advocate of making very few investment choices. That doesn’t mean he suggests that people do nothing. He spends hours every day reading and monitors the economic situation closely. But when it comes to taking action, for Buffett, less is more. He suggests that people imagine having a punch card with twenty boxes on it. Each time they trade a share, they can imagine punching one of the holes. They only have one such card for their lifetime.
The benefit of this mental model, Buffett reckons, is that investors will pass on decent opportunities which come their way. Instead they will wait for spectacular opportunities – and then go in in a big way. Cautioning against what he calls dabbling, Buffett says, “Big opportunities in life have to be seized. We don’t do very many things, but when we get the chance to do something that’s right and big, we’ve got to do it. And even to do it in a small scale is just as big of a mistake almost as not doing it at all”.
2. Circle of competence
Stephen Covey’s influential book The Seven Habits of Highly Effective People highlights the difference between someone’s “circle of concern” and their “circle of competence”. Buffett applies this distinction closely, always taking care to stay within his circle of competence.
Buffett has identified certain industries – insurance, retail banking, consumer goods, and construction materials are examples – where he feels comfortable making decisions about buying shares. When he is offered shares in an industry he does not understand, no matter how attractive it may be, Buffett doesn’t bite.
That means he misses some great opportunities. But he also misses investing in something he doesn’t understand, which can often be a costly experience. It can seem boring to stick to the same few business areas or types of company when investing. But, Buffett is happy to forego excitement in the pursuit of financial reward. He reckons he is more likely to get that when he invests in a company whose prospects he feels able to assess. The key point is not how broad or narrow one’s circle of competence is, but that one doesn’t stray outside it.
3. Margin of safety
Some people profit from making small trades based on movements in share prices. A few pence of gain can turn into thousands of pounds if the stake is big enough, after all.
Warren Buffett’s not interested in that. First, he is an investor not a speculator. He seeks to buy an interest in companies he thinks have compelling long-term business prospects, not simply buying shares to flip them in short order. Secondly, Buffett demonstrates an attachment to the concept of margin of safety when investing. He doesn’t worry too much about buying shares at the absolute best possible price. Instead, he waits – sometimes for years – for a company to come along whose prospects he likes so much that he thinks he can profit handsomely even if the shares aren’t cheap. Then he invests in a large way, sits back, and lets time work its magic.
4. Warren Buffett on keeping things simple
Warren Buffett isn’t a particularly simple person. He has a complex, curious mind, and a vast set of experiences. Yet when it comes to his investment approach, he clearly likes keeping things simple.
Back in 2014 in the Berkshire Hathaway annual shareholders’ letter, Buffett laid out his six criteria for acquiring businesses. The fifth criteria was “Simple businesses”.
Buffett likes simplicity because it makes it easier to understand something. That is important because only if one can understand something is one able to evaluate it. In the long term, stock market returns depend on being able to identify a mismatch between a company’s likely future earnings and its current valuation, discounted for the long-term cost of capital. When companies describe their businesses in overly complex ways which are not easy to understand, I treat it as a red flag. Like Buffett, I think it pays to keep things simple.
5. Thinking long term
Retirement is decades away for some people, while for others it will come much sooner. But through his whole investing career, Buffett has taken the long view. Even now, in his nineties, he avoids short-termism in his decision making.
6. Read and learn
Two things occupy much of Warren Buffett’s time — but only one is common to most investors. The first is sleeping. The second is reading — a lot.
Buffett is an avid reader – of newspapers, magazines, books, company annual reports, and other information sources that help him invest wisely. He sometimes recommends books and other reading matter to investors. He spends hours reading up on companies before deciding whether to invest in them.
Interestingly, Buffett often doesn’t bother meeting company executives before investing in a business. Instead, much of his legwork is reading publicly available information, such as a company’s annual reports and financial filings. As a private investor, I can follow this approach for free.
7. Start as soon as possible
Buffett’s investing career almost spans a lifetime. He bought stocks as a teenager, many decades ago. The power of compound interest means that, over time, successful investments can become exponentially more rewarding.
If retirement is looming, the time for future returns to accumulate can be shorter than if it is still decades into the future. But whether starting young or old, I think the lesson from Warren Buffett here is: start! He demonstrates the power of taking action.
That doesn’t mean that one ought to invest immediately. After all, Buffett happily waits years for the right opportunity for him to come along. But it does mean that a Warren Buffett approach towards getting rich for retirement would involve taking immediate action, today. For example, one could define one’s circle of competence, and start to read about and assess potential investments that sit in those areas. The key thing is, with the objective of retiring rich, starting to take even small steps towards achieving it.
