Warren Buffett: How Investors Can Get Rich

TLDR 

Through compiling many annual meetings and college speeches, I have isolated key points Warren Buffett has for how young investors can successfully build their wealth. This article is his advice geared toward individuals who want to replicate his success. 

Key Points

• Start Early

• Study Many, Purchase One

• Go Big On Good Opportunities

• Surround Yourself With Winners

Start Early

Build experience. If you want to be a successful investor, you should work at a number of businesses to understand how each of them works. Investing in stocks is a small piece of business, so to truly get into this world, you should know the inner workings of a variety of companies from firsthand experience. This includes talking to individuals in the different aspects of the business to build a holistic view of the operations. Along with firsthand experience, reading every book you can get your hands on about investing and the markets is a must. Successful investors must love to read and consume information nonstop to find opportunities and understand the interaction of the world around them.

Study accounting. If you are interested in business, you must learn accounting, it is the language of all businesses. The language, however, is not perfect and there are limitations, so you must learn to read it and assess potential investment opportunities. 

Build temperament. To be a successful investor, you need to be okay with both going with and against the crowd. You are only right when your facts and reasoning are right, not because a thousand people agree or disagree with your investment proposal.

Compound earnings. To build great wealth, you need to begin to roll a snowball on the top of a very long hill, either by starting young or living to be very old. Understanding this is paramount for massive growth later in life. Even though investment growth will be modest in the beginning, investors should stick with it, 10% of $10K seems like a waste of effort for the year, but when that amount reaches $1M, a 10% return turns into a very comfortable household income. Warren Buffett takes this a step further and advises investors to rarely hold onto cash, it's an asset that depreciates over the long term, so park the money into a producing asset.

Invest in yourself. Let's do a thought experiment. How much would you require someone to pay you for 10% of your earning power for the rest of your life? Would you sell your 10% royalty check for $100K, or maybe $500K cash right now? Whatever the number you thought would be worth 10% of your future earnings, what does 100% equal? If you valued 10% of your lifetime earnings at even $100K, that means you valued 100% of your equity at $1M, so what are you doing now to bring a return on your future earnings? Are you just holding it in cash doing nothing with your value, or are you investing in yourself to compound that value even more? The lesson here is to invest in yourself, study investing, and consume as much information as you can. Buffett notes that learning communication is massively useful, investors must be able to express their ideas properly to others, especially if wealth management is their pursuit. Buffett takes this idea even further by stating the importance of taking care of your mind and body. You only get one of these in life, and just like investing whatever you put into your body and mind will compound, whether positively or negatively.

Study Many, Purchase One

The key to investing is to turn over as many stones as possible, whoever does that has a higher chance of finding a winner. Investors have to research a multitude of companies to find good deals on great businesses.

Warren Buffett's best annual return was during the period of 1950 to 1960, before he formed Buffett Associates and began professionally managing money. During this period, he averaged a return of 50% per year. He even admitted he could replicate that process today if he did not have the burden of managing the vast amount of capital today. At the time, he was working with a tiny amount of money, about $10K to $15K per investment (around $150K nowadays with inflation). Eventually, once you start getting money into the millions or many millions, the expected results go down significantly and a 50% return will no longer be possible. 

If you were interested in copying his success, focus on small-cap companies with a market capitalization between $300M and $2B. These companies will have higher growth than mature businesses and because you have smaller funds, opportunities may be overlooked that institutional investors are unable to allocate capital to due to their assets under management. They are unable to buy little pieces of these businesses at attractive prices.

Bet Big On Good Opportunities

Go all-in. Typically, the biggest mistakes are the ones that don't show up in the investor's track record, they are acts of omission, not commission. It's the things the investor knew enough about to act on but decided not to. These regrets should not include opportunities the investor didn't know enough about at the time, which the investor could not help. Either the investor did nothing at all about the opportunity, or they did act but did it on too small of a scale to properly benefit.

Buy good businesses. A good business is not a company that will only be good for 3 years, but continue on for another 30 years. If you could imagine buying a stock now, and not feeling bad about the returns from the company after going on vacation for 30 years, that is a good company worth investing in.

Don't diversify. Diversification is a protection against ignorance, it makes very little sense for those who know what they are doing to do this. Even an investor juggling 30 stocks is probably too many for those who know how to analyze businesses. There is too much information to keep track of and you cannot give each company the due diligence they require for optimal gains. Many investors say it is risky not to diversify among a variety of businesses; this should not be so. There is an improper definition of risk floating around the investment world, the risk of investing is not the same as asset volatility. An illustration warren buffet used was the purchase of farmland back in the 1980s. The going rate per acre was around $2K, but after the banking and farm crash took place, Warren Buffett was able to purchase them for $600 an acre. The beta, or risk, shot way up after the price dropped and standard economic theory said he was buying a much more risky asset at $600 than the same farm acre for $2K. This makes zero sense. Risk only comes from the nature of certain kinds of businesses and from not knowing what you are doing. If you understand the economics of the business, what they are engaged in, know the management team, and know the price that you paid is sensible, there should be very little actual risk.

Surround Yourself With Winners

Lastly, Warren Buffett advises young investors to surround themselves with better people than they are. You are going to move in the direction of the people you associate with, so make sure that is the path you want to take. 

On top of associating with better and smarter people than yourself, you need to look for individuals that are living examples of what you want to become. Picking a mentor that has lived a life similar to what you seek is the best way to follow in their footsteps and mirror that life.

Eventually, as the investor gains success, they need to learn to work through other people. The ability for the investor to find people who know and love their job will be a challenge, but when they are actually found, let them work for you the best way they can without micromanaging. The point of successful investing is to hire people that can do a better job than you in those specialized areas.