Warren Buffett is an American business magnate, philanthropist and one of the most successful investors of the past two decades. Buffet focuses on specific themes that lead to his success. While everyone’s financial profile is as unique as their fingerprints, if each of us would integrate Buffet’s mentality and strategies into our personal investment philosophy, we would be equally capable of becoming financially independent.
1. Focus on the big picture
Understanding your financial profile, establishing your goals and developing a plan is the first step to being financially independent. Many of us have savings and investments in a variety of places but few understand how they all work together. Looking at the bigger picture will show you how the financial pieces fit together and what pieces are missing.
2. Invest in Companies that are proven
Buffet looks for solid companies that have proven long term track records, have advantages over their competition and pay good dividends. Companies that consistently increase their dividends year after year show commitment to their shareholders. Historically, dividend stocks have outperformed during market downturns, making it a compelling reason to own dividend stocks.
3. Control your emotions
Sissies beware, the market isn’t for you. Warren Buffet owes much of his success to “time and the power of patience.” With a long term perspective, the emotions attached to a fluctuating market are almost eliminated. Have a written investment strategy that outlines your objective, your specific selection criteria, and how you will manage your emotions when the market gets tough. Stick with a disciplined strategy that will carry you though the good times and the turmoil.
4. Don’t let your ego get in the way
Surprisingly, many professional athletes are financially broke within 3 years after retiring from the professional league. Hard to believe that with the enormous salaries these professional athletes command, that they should ever run out of money.
So, what are the characteristics and qualities of a millionaire?
- Be humble and live a relatively modest lifestyle. Having fun does not have to be expensive. Buffet is a “banjo-playing, cheeseburger fan who has lived in the same modest house in a not-so-glamorous Omaha Nebraska neighborhood for 55 years.”
- It’s never too late to start investing. Buffet earned 99 percent of his wealth after age 50.
- Understand your values and behavior about money. If you are an impulsive spender, ask yourself “Do I need this?” Establish an amount at which you will wait seven days before making the decision to buy. For example, if the purchase is more than $500, then wait seven days to determine if it is still an important buy.
- Be generous. Charity and contributions of time and/or money are a common thread among financially successful people like Warren Buffet. Buffet, consistently ranked as one of the world’s wealthiest individuals, has pledged to give away 99 percent of his fortune.
5. The value of compounding dividends
Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Need I say more? Buffet contributes compounding dividends as one of the major keys to his success. 40% of the S&P 500 return came from compounded dividends. Over the long term, the stock market has averaged 8%. If you own a stock that pays 4% in dividends then you are already half way toward the 8%.
6. Stick to what you know
Warren Buffett invests in what he knows and understands. Buffet continues to educate himself and reach out to knowledgeable people in business and finance. If you don’t have the inclination, resources or time, find a financial adviser who shares your financial values to help you. Make good, educated decisions with quality information that backs your investment decisions.
7. The dangers of Timing
Buffet has been called the “greatest investor we will ever see in our lifetimes.” The reason is that he buys quality stocks and holds them for many years. Buffet once said “buy when the market is scared and sell when the market is greedy.” However, if you choose good quality companies, there should be no need to sell at all. Meanwhile the rest of Wall Street, with their short term mindsets and get rich quick attitudes, flip high risk, trendy stocks. Timing the market assumes knowledge of the future. How is it possible to know what world events that shake the markets will occur next week, next month or next year? A study by Dalbar shows that the average investor invested in a blend of equities and bond funds has averaged just 2.5% over a 20 year time frame, while a comparable index has averaged over 8%. Why? Mostly because they chase returns, (buy when the market is comfortable and sell when the market is scary), attempt to time the market, and let emotions drive their decisions.
- Have a written investment strategy.
- Invest for the long haul.
- Diversify among industry sectors
- Buy companies that sell products or services you understand
- Select companies with proven track records that pay dividends
- Maintain a disciplined strategy that minimizes emotional decisions
- Develop a financial plan
Those who have a written financial plan are consistently wealthier than those who do not have a plan. As financial planners and advisors, we admire the qualities that Buffet demonstrates and incorporate his investment strategies into in our practice.
Written by Sue Brown and Jean Freeman of Brown and Freeman, LLC
Brown and Freeman, LLC is an independent financial advisory firm providing financial planning and investment management.