Warren Buffett is one of the richest people in the world. He started at a young age and has built a huge amount of wealth by being frugal and investing for the long term in businesses that can compound over many years.
While there is plenty to worry investors about, I think now can prove to be a great time to invest despite the inflation, banking concerns in the United States and Europe, and so on. Share prices donât fall heavily for no reason â itâs only when there are real concerns that the market goes noticeably backwards.
Indeed, Warren Buffett said one of the worldâs often-quoted pieces of advice about investing:
Be fearful when others are greedy, and greedy when others are fearful.
As individual investors, we canât control what management teams will do in their businesses. However, we can control when we invest and the price we pay. Itâs times like this that can open up much-cheaper prices for some of the best investments out there.
Invest like Warren Buffett
Warren Buffett hasnât precisely told investors what his formula is for investing. But, he has revealed a number of factors that he keeps in mind.
He typically stays within his âcircle of competenceâ. What that means is that he only invests in businesses and industries that he understands. I think it keeps things simpler, it makes it easier to understand if things are going well, and it may mean itâs easier to know when to sell.
Buffett also likes to find value, he says itâs best to invest in great businesses at fair prices rather than trying to invest in fair businesses at cheap prices. He also likes those businesses to have a strong economic moat, or a strong competitive advantage. That means theyâre more resilient to competitors trying to âinvadeâ and hopefully strong enough to get through times like this unscathed.
When there is widespread fear in the market, it gives investors the chance to buy almost every investment at a cheaper price. As the investment environment recovers, as it always has in the past, share prices can then rise.
How to build a $1 million portfolio starting at 40
Between 1965 to 2022, Warren Buffettâs company Berkshire Hathaway has returned an average of around 20% per year. However, the last five years havenât been as solid as that because it becomes increasingly difficult to perform strongly as the portfolio becomes bigger.
It wouldnât be easy for you and me to try to achieve gains like that. So, just achieving a return of 10% per annum could turn out very well for wealth-building at the starting age of 40. Or any age for that matter.
Investing $500 a month, returning an average of 10% per annum, would turn into $590,000 after 25 years â taking the investor to 65 years old.
If we bump that up to investing $1,000 per month, it would become $1.18 million after 25 years if it returned an average of 10% per annum.
Thatâs not quite the same wealth as Warren Buffett, but itâd achieve an adequate lifestyle for investors.
However, remember that investing in great businesses can still mean volatility. Just look at what has happened to the Wesfarmers Ltd (ASX: WES) share price in recent times.
But, just because a share price moves down in the short term doesnât mean that the company has turned rubbish. There will likely be market declines over a 25-year period, but those could be the best times to buy.
The post No savings at 40? Use the Warren Buffett method in 2023 to target financial freedom appeared first on The Motley Fool Australia.
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Motley Fool contributor Tristan Harrison 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 has positions in and has recommended Wesfarmers. 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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