Warren Buffett managed to become one of the world's richest investors simply by investing and compounding wealth. Following some of his pearls of wisdom can help us become millionaires thanks to the stock market.
The legendary investor invested through, and led, Berkshire Hathaway, an investment business that has had long-term investments in insurance, railroads, banking, American Express, Coca Cola and more recently Apple.
Here are some of Warren Buffett's best investment philosophies.
Be greedy and fearful
One of the most useful pieces of advice is how he approaches investing during bull markets and bear markets:
Be fearful when others are greedy and greedy when others are fearful.
In other words, be cautious about buying shares when the market is seeming very optimistic. However, when there is a lot of fear around, that's the time to load up on good value ASX shares.
Imagine there's a company that is going to reach a share price of $10 by 2030 and it's currently at $5 today. This would imply a return of 100% – not bad at all. But imagine there's a market crash during that journey that sends the share price down (40%) to $3 – going to $10 from there would be a return of 233%.
Circle of competence
One of the main suggestions by Warren Buffett is to only invest in places on the stock market that are within our 'circle of competence'.
By that, he means only investing in investments that we understand. That's not to say we need to have a geology degree to invest in an ASX mining share. But, it is saying that we should have a good understanding of the investment, what are the positives and negatives? Will we understand developments as time goes on?
By understanding the investment, we can better evaluate what's going on with a business, what a good price is, and whether a decline in the share price is an opportunity or there's a serious issue.
This thought process can be applied to both individual ASX shares and exchange-traded funds (ETFs). The possible investments of Global X Robo Global Robotics & Automation ETF (ASX: ROBO) and Vanguard MSCI Index International Shares ETF (ASX: VGS) are very different.
By using Warren Buffett's advice here, we may be able to avoid some bad blowups by skipping the highest-risk speculative investments.
The stock market is an exercise in patience
The 'Oracle of Omaha' once said that the "stock market is a device for transferring money from the impatient to the patient."
I believe that ASX shares can produce the strongest returns for people over the long term. However, it still takes time for compounding to do its thing.
For example, the ASX share market has delivered an average return per annum of around 10%. It would double someone's money in around eight years. But, it would take eight years. Almost everything else in our lives can be delivered in a matter of hours or days, depending on what we're talking about.
It takes a lot of patience for compounding to do its work, but it's a very powerful force if given the time to do its thing.
