The Motley Fool

How Warren Buffett made his billions (and how to make yours!)

Warren Buffett is one of the most successful investors of all time. He has gradually grown his wealth over a number of decades to become one of the richest people on earth. In doing so, he has inspired a number of other investors with his methods – many of which are relatively straightforward and can be implemented by anyone seeking to improve their own financial circumstances.

With that in mind, here are a number of key steps in Buffett’s journey towards becoming a multi-billionaire which could help to improve your financial future.

Live within your means

Warren Buffett is not only famous for being wealthy, he is also well-known to be extremely frugal. He has lived in the same house for most of his life, is said to drive a bog-standard saloon car and appears to only be interested in goods and services which he feels offer good value for money.

This unrelenting focus on living within his means may appear to be a waste of time to some investors. After all, Buffett could spend $millions every day and never run out of cash. However, it appears as though a frugal philosophy has become ingrained in his personality after years of developing the habit of saving money.

In his younger years, this attitude is likely to have saved significant sums of money which went on to provide him with the capital to invest in stocks, which then went on to make $billions. As such, getting into the habit of saving money could prove to be the most important step in an investor’s journey towards being successful in the stock market.

Invest as much as possible

While Buffett is known to favour having large amounts of cash on hand in case of emergency or if buying opportunities present themselves, he invests the rest of his capital in stocks. This means that he is more exposed to market downturns than some of his peers since he is not too concerned about diversifying when it comes to asset allocation. But at the same time, it also means that he stands to benefit to a large degree from rises in the stock market.

Perhaps one of the most difficult aspects of investing to explain to anyone is how the odds are stacked in an investor’s favour. The track record of the S&P 500, for example, shows that while there are periods of volatility and downturns, the overall trajectory, in the long run, is upwards. Therefore, buying a variety of stocks and holding onto them for many years could generate impressive returns.

Business ownership

Rather than thinking of stocks as names and numbers, Buffett never loses sight of them being businesses in which he is a stockholder. This is a sound means of considering the stocks held within a portfolio. Even if an individual owns a tiny portion of a company, they are still a part-owner. This could help them to take a longer-term view on the prospects for the business, and become less concerned about short-term price movements or quarterly fluctuations in profitability.

Through being a long-term investor who lives within their means and invests in stocks for the long term, it may be possible to significantly improve your financial position – just as Warren Buffett has done.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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