Forget day trading! I'd use Warren Buffett's 'secret sauce' to build wealth

As Buffett recently wrote: "the weeds wither away in significance as the flowers bloom".

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Key points

  • Billionaire Warren Buffett commands a fortune of over US$100 billion, with much of that built on the stock market
  • But the investing icon doesn't partake in day trading
  • In fact, some of his most recent advice – touted as the 'secret sauce' to investing – is: 'over time, it takes just a few winners to work wonders'

There are many schools of thought when it comes to investing in ASX shares. Some of the most prominent boil down to long-term investing or short-term investing, and day trading is an extreme version of the latter.

While market watchers might find day trading tempting, it's rarely a useful wealth-building tool. In fact, research conducted between 2013 and 2015, cited by CNBC, found 97% of persistent day traders lose money.

It's also the opposite approach to that which billionaire investing great Warren Buffett recently touted as the stock market's "secret sauce". That is: time.

Let's dive into the wisdom that helped Buffett build his US$104.6 billion fortune, and that might help me build mine.  

Warren Buffett's 'secret sauce' to wealth building

Buffett's recently released annual letter to Berkshire Hathaway shareholders once again reiterates the billionaire and his partner Charlie Munger are "not stock pickers; we are business pickers".

And on that note, he delved into some of the massive wins he's chalked up over the decades.

The first being Coca-Cola. Buffett's listed holding company snapped up 400 million shares in Coke for US$1.3 billion over the seven years ended 1994. Similarly, Berkshire Hathaway bought US$1.3 billion of American Express stock over the years to 1995.

Today, those respective holdings bring in US$704 million and US$302 million in dividends. Not to mention, they were worth US$25 billion and US$22 billion respectively at the end of 2022.

Such massive wins bring a key lesson to investors, says Buffett:

The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.

Investing for the long term

Even Buffett admits his investing results are "the product of about a dozen truly good decisions". But, perhaps more importantly, they're decisions he has stuck by.

That means investing for the long-term, rather than a day. It also means he's seen his wealth compound over and over.

Meanwhile, Arizona State University finance professor Hendrik Bessembinder's widely-cited research, later replicated in Australia, found just 4% of US stocks were responsible for all of Wall Street's gains.

Bessembinder advises that building a diverse portfolio of shares is often the best way to build wealth on the stock market.

My takeaway from such advice is to invest in a diverse range of companies you truly believe can outperform when they're trading at a reasonable price, then sit back and watch them do just that – a strategy that is quite the opposite of day trading.

Munger's 2-cents

Buffett's business partner Munger has also weighed in on what he thinks is the key to investing. He said the pair avoid the market's 'froth', continuing:

The world is full of foolish gamblers, and they will not do as well as the patient investor.

Munger also pointed to a quote from Ben Graham, who is widely regarded as the father of value investing. He once said:

Day to day, the stock market is a voting machine; in the long term it's a weighing machine.

In my opinion, the two quotes perfectly encapsulate the difference between day trading and long-term investing.

In the short term, investing is arguably a game of popularity. However, over time the market will typically weigh a company's fundamentals, driving the value of quality businesses higher to the benefit of patient shareholders.

American Express is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool Australia has recommended Berkshire Hathaway. 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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