With nothing in the bank, I’d use Warren Buffett’s method to build wealth

a pot of gold at the end of a rainbowa pot of gold at the end of a rainbow

Warren Buffett may be one of the world’s richest people, but anyone can replicate the billionaire’s investment strategy ­– even ASX investors starting from scratch.

Buffett has generously offered investing advice for decades. In the meantime, he’s amassed a US$106 billion fortune on the stock market.

Let’s take a look at a few of the billionaire’s key lessons I’d employ if I were to be starting out on my investment journey.

The best opportunity is often the one you understand

The decades gone by have brought many a market trend. Think, booming ASX tech shares seen amid the low-interest rate environment of the 2010s and the rise (and fall, and rise, and fall) of cryptocurrencies.

But rarely will you see Buffett getting on board with such developments. That’s because the ‘Oracle of Omaha’ aims to invest in what he knows, and what he knows alone.

It’s what he calls his “circle of competence”. He once said:

There are all kinds of things I’m not competent to value. There are a few that I am confident to value … I don’t have to make money in every game.  

The companies behind ASX shares are generally complex machines, often operating in even more complicated fields.

Thus, an investor who admits what they know and what they don’t and chooses to invest within that circle of competence may be best prepared to identify winning opportunities.

Look to the horizon

Pop culture often depicts investing in the stock market as a fast-paced, ride-or-die activity. Images of flashing red and green boards and hour-by-hour share price updates can perpetuate this myth.

But those focused on long-term wealth building generally have plenty of time to decide if an ASX share is a buy.  

Long-term investing is more often a game of quality. Buying shares in a quality business with a good management team and plenty of room for growth will likely help build wealth over the years and decades to come.

Indeed, Buffett spends plenty of time pondering, researching, and analysing a stock before buying in.

He also advises that an investor doesn’t need to buy every opportunity that comes their way. There’s no penalty for not snapping up the ‘next big stock’ whenever it comes around.

Don’t pay too much for a quality ASX share

The final piece of Buffett wisdom I’ll leave you with harks back to one of his most famous mantras:

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Note, the billionaire’s criteria is a “fair” price. He doesn’t pay too much for a share, even if it’s in a “wonderful” company.

Indeed, buying an ASX share for more than its underlying value can be a sure way to stall long-term returns as there’s less room to realise growth.   

Further, Buffett told investors in 2014 that buying cheap stocks in fair businesses is “the wrong foundation on which to build a large and enduring enterprise”.

There are many ways to find out if a stock is trading cheap. Perhaps the simplest is its price-to-earnings ratio.

The post With nothing in the bank, I’d use Warren Buffett’s method to build wealth appeared first on The Motley Fool Australia.

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Before you consider S&P/ASX 200, you’ll want to hear this.

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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 no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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