No savings at 31? I would use Warren Buffett’s method to build wealth

Warren Buffett at a Berkshire Hathaway general meeting

As life progresses, it becomes less and less realistic to stop thinking about how to improve long-term financial well-being. After all, time is an investor’s friend. Starting too late can make it difficult to accumulate wealth. However, it is encouraging that some investors, including the legendary Warren Buffett, have accumulated most of their wealth after the age of 50.

If you were in your thirties and wanted to start investing from scratch, here are three principles from Buffett that you would apply.

stick with what you know

So, over 30 years old and with no investments, where is the best place to start? Some people think they can strike it rich by investing in developing areas they hope to grow, from commercial space exploration to the metaverse.

But Buffett has spent most of his career investing in a few industries, most of which are long-standing and pretty boring. They include insurance companies, banks such as Bank of America and consumer goods companies such as kraftheinz.

That is not an accident. Buffett believes that only by investing in what he knows can he assess a company’s prospects. Doing that is important in judging whether its stock price is attractive or not.

I think the same principle holds true for me as a private investor.

Do some things, but on a large scale.

Like any smart investor, Buffett doesn’t put all his eggs in one basket. Reduce risk by diversifying between different companies.

But interestingly, Buffett does not invest in hundreds of companies. He owns shares in a fairly small number, some of which he has owned for decades. This is because he understands that great returns on investment don’t come from a scattershot approach where a little money is invested in many different companies.

Instead, Buffett waits for what he believes to be not just a good but an excellent investment idea. He then invests a considerable amount in it.

Most people will never deal with the amount of money Buffett has at his disposal, but I still think the principle can help me build wealth. I will focus my efforts on a limited number of investment ideas that I think are great, not a bunch of investment ideas that I think are just good.

Warren Buffett obsesses over valuation

A common mistake among new investors is to invest in companies simply because they have an attractive business.

What’s wrong with that? In short, a good deal does not necessarily equate to a rewarding investment. Even in a good business, the returns on investment depend on the price paid.

That is why Buffett goes into great detail on the question of how to value stocks. Sometimes, as in the case of his previous investment in IBMhe likes the business for decades before investing when he thinks the valuation has finally become attractive.

Valuing a company is important to make us not only buy big businesses, but big businesses negotiate at attractive prices.

The post No savings at 31? I’d Use Warren Buffett’s Method to Build Wealth first appeared in The Motley Fool UK.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the stocks mentioned. Motley Fool UK has no position in any of the stocks mentioned. Opinions expressed about companies mentioned in this article are those of the author and may therefore differ from official recommendations we make on our subscription services such as Share Advisor, Hidden Winners and Pro. We here at The Motley Fool believe that considering a wide range of ideas makes us better investors.

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