Warren Buffett has made many billions of pounds in the stock market. But he started as a schoolboy, with no shares at all until he spent some money from a paper round to dip his toe in the market.
I am applying some lessons from Buffett as I aim to build wealth in the stock market. An investor could use the same approach starting with nothing. Here are those five steps.
1. Getting some capital to invest
Buffett began with nothing but he saved up to buy shares.
Whether from savings, regular contributions or a combination of the two, it does take money to invest in the stock market.
Like Buffett, another additional source of funds I use to build up my investment capital is dividends I earn from shares. Rather than frittering that cash away, I use it to fund more share purchases – a simple but powerful technique known as compounding.
2. Finding brilliant companies that excite me
Buffett only invests in companies he understands. But he also sticks to just a few such companies.
They are ones that have a business model that excites him. As an example, consider Buffett’s biggest holding (even after selling down a lot of his stake last year): Apple (NASDAQ: AAPL).
The company is targeting a user market that is massive and likely to stay that way. It has built loyalty with an existing customer base due to proprietary technology, a product and service ecosystem and iconic brand. That gives it pricing power that underpins the firm’s large earnings.
3. Buying at the right price
Still, lately Buffett has been a seller, not a buyer, of Apple shares.
The exact reasons are unclear although Buffett has mentioned taxation as a consideration. But the reason I am not buying Apple shares at their current price is I think they are too expensive.
Yes, it is an excellent business. But revenues have been falling and Apple faces risks from tariffs adding costs to its supply chain and increased competition from Chinese rivals.
Buffett does not just aim to buy great companies. He also aims to buy such shares at an attractive price.
Just buying into a great company is not necessarily a way to build wealth. In fact, if the price paid is too high, it can end up destroying wealth.
4. Taking the long-term approach
Typically though, Buffett takes a long-term approach to investing. He aims to buy and hold.
That makes sense to me. Owning a share that keeps raising its dividend (as Buffett’s long-term holding Coca-Cola has done) can mean a shareholding just sitting in the portfolio ends up generating more money each year.
5. Taking risks seriously
While it is easy to focus on what Buffett gets right, he also takes care to try and avoid costly mistakes.
Some are inevitable over time. But he takes weighing risks seriously, paying as much attention to what might go wrong with an investment as to what might go right.
This post was originally published on Motley Fool
