Jon Smith talks about advice that Warren Buffett has offered over the years that could help him to reach his financial goals.
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Legendary investor Warren Buffett could have retired a long time ago. Now in his 90’s, he’s still active on decision-making for the investments that his company oversees. Given his ability to make huge profits over several decades, this isn’t a bad thing.
I’d like to be able to retire early, and so I need to grow my investment pot in coming years to reach this goal. Here’s what I’ve picked up from the great man.
I think there’s a misconception that the more buying and selling of stocks I do, the more profitable I’ll be. In fact, overtrading can cause high transaction costs and can lead me to miss out on some market moves.
Buffett is an advocate of this, commenting: “I do more reading and thinking, and make less impulse decisions than most people in business.”
Instead of rushing to simply buy what’s hot at any moment in time, I want to do my homework. Sure, I might miss the boat on some ideas. But when trying to focus on retiring early, I want to concentrate on picking more consistent winners.
The second point that I think is key is good risk management. Buffett noted that “risk comes from not knowing what you’re doing”. This might sound obvious, but it makes a huge difference when I’m investing for the long run.
For example, I’ve still got a couple of decades to go before I could be in a position to retire early. So stocks that I buy are those I’ll aim to hold for years to come. If I bought high-risk stocks that I hadn’t properly checked out, it could cost me big over this timeframe.
In the course of a week or a month, the share price might not crash. But over the space of a year or more, the cracks will likely show. Earnings misses, dividend cuts, business restructuring and more are all problems I could have to contend with. So I want to be smart and pick sustainable ideas, even if some are less exciting than other growth names.
The last piece of advice (a well-known one) is to “try to be greedy when others are fearful”. When the stock market is falling, that’s actually a good time to be buying. If I strip out my emotions, the logic behind this is that often the long-term fair value of a stock dislocates during aggressive selling.
When the dust settles after a crash, history shows that the market does eventually recover. If I can implement this in the years to come, I should be able to boost my returns to be above average. This in turn will help me to reach my financial goal before state retirement age.
Given the long-term timeframe, there are a lot of things out of my control. Any negative events might force me to work for longer. Yet these hypothetical risks will be dealt with as and when they arise. I’m not worrying about them right now.
Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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