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Forget the lottery: I’d follow these 3 Warren Buffett tips to retire early

Since the odds of winning the lottery are exceptionally slim, following Warren Buffett’s advice could be a better means of improving your financial outlook.

After all, the ‘Sage of Omaha’ has become one of the richest people on earth. He has achieved this goal by investing the vast majority of his capital in the stock market during uncertain times when other investors are flocking to less risky assets.

Furthermore, Buffett has only ever invested in businesses that he understands. This may have caused him to miss out on some profitable opportunities, but has also helped him to avoid losing money.

Investing in stocks

While some investors may focus their capital on a wide range of assets such as bonds and property, Buffett has generally sought to make gains on the stock market. While this may have caused his portfolio to be more volatile than some of his peers over short time periods, in the long run stocks generally provide a superior return profile compared to other mainstream assets.

As such, if you have a long-term time horizon then it may be worth concentrating your capital on undervalued stocks that offer growth potential. Certainly, risks such as the ongoing global trade war and political risks in the US and Europe could hurt their performance in the coming months. But the track record of indices such as the S&P 500 and FTSE 100 shows that they have been able to post high-single digit annual returns over a sustained period of time.

Capitalise on cyclicality

The volatility of the stock market could provide buying opportunities for patient investors. Buffett, for example, has often purchased high-quality businesses while they trade on low valuations during various financial crises. In doing so, he has been able to obtain a more favourable risk/reward ratio within his portfolio than would have been the case had he purchased the same stocks during a bull market.

While the world economy may still be experiencing encouraging levels of growth, risks are present. They may gain traction in 2020, and could cause investor sentiment to weaken. This may provide buying opportunities for long-term investors. Since major stock indexes have always recovered from their lows to post record highs, the strategy is likely to pay off over the long run.

Invest in companies that you understand

Warren Buffett has missed out on a wide range of opportunities to generate high returns because he avoids investing in companies he does not understand. Technology businesses are notable examples of this, with Buffett focusing his capital on simpler companies that may not always have performed as well.

While this attitude may mean that you miss out on the growth potential of a wide range of businesses, it could also help you to avoid unnecessary losses. No investor can be an expert in every sector, so focusing on businesses that you understand and then seeking to buy them at a low price could be the most effective means of boosting your financial outlook.

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Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. 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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