With a net worth of $103.7 billion, Warren Buffett — aka the "Oracle of Omaha" — currently ranks as the sixth-richest person in the world.
His net worth is more than the annual GDPs of Cambodia, Iceland, and Honduras... combined.
But not too long ago, Warren's bank account was sitting at a mere $6,000, which kind of makes you wonder...
How did he do it, and what was his secret?
Well, believe it or not, the answer to that question is surprisingly simple. Buffett built his now massive fortune on a set of easy-to-follow rules that we'll reveal to you today.
And while we can't promise that you'll become mega-rich like Uncle Warren overnight, we can confidently say this is one of the most tried and trusted investment strategies out there. It's worked not only for Mr. Buffett but also for countless other investors who've built generations' worth of wealth over their lifetimes.
Below, you'll find Buffett's most crucial secrets to growing personal wealth. You'll also find a full rundown of Buffett's current portfolio, so you'll be able to see exactly the kinds of companies that the world's greatest investor on record thinks are worth owning today...
Buffett Lesson No. 1: Channel the Tortoise
I'm sure you're already familiar with the classic tale of the tortoise and the hare — the lesson being that slow and steady wins the race. Well, if Warren Buffett had a spirit animal, it would no doubt be the tortoise.
One of Buffett's better-known pieces of advice is that your favorite hold time should be “forever.” Of course, Buffett doesn't mean that you should never sell a stock, but rather that you want to invest in companies that will be around for the long term.
While there are many investors out there who make a killing buying and selling stocks on a regular basis, Warren has long promoted a more patient strategy of ignoring near-term stock fluctuations. In short, the one thing that Warren is more concerned about than anything is...
What's the company worth relative to its stock price?
Now, that might seem a bit too simplistic of an explanation, but the concept works to help investors in avoiding the many emotional pitfalls of investing.
Warren Buffett believes in value investing and is a student of the valuation techniques pioneered by the great Benjamin Graham, author of perhaps the most renowned investment book ever, The Intelligent Investor.
Buffett typically screens for companies that have:
- Low debt.
- Access to cash.
- A strong return on equity (ROE).
- Favorable price-to-earnings ratios (P/E).
- High dividends.
- Buyback plans.
Buffett Lesson No. 2: Dollar-Cost Average
If a stock goes down, the reaction of inexperienced investors is to cut their losses. The reaction of Buffett, though, would be to gradually buy even more of that stock — so long as it remains below its intrinsic value.
While this specific strategy won't net you large returns in the near term, the idea is that over the long run, it'll pay off because you've continued to buy the company at a discount to its real value. The technical term for this strategy is “dollar-cost averaging” (DCA,) which is defined by Investopedia as:
An investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high.
One of the core tenets of Buffett's investing philosophy is that you can't time the market. And for the most part, he's right that you can't. DCA is an excellent strategy if you don't want to try to time the market because it lessens the risk of investing a large amount in a single investment at the wrong time...
Buffett Lesson No. 3: Sit Back and Compound
Another key aspect of Buffett's buy-and-hold strategy is compounding returns, or what Albert Einstein once jokingly referred to as the eighth wonder of the world.
Simply put, you need money to make money. And the more you have, the more of it you can make.
Consider the following scenario...
Suppose you invest $10,000 into Apple (NASDAQ: APPL). The first year, shares rise 20%. Your investment is now worth $12,000 — a gain of $2,000.
Because you still like the company, you decide to hold onto the stock. The second year, shares appreciate another 20%. This time, your investment is now worth $14,400 — a gain of $2,400.
Rather than having your shares appreciate by $2,000 like they did in the first year, they appreciate an additional $400 because the $2,000 you gained in the first year also grew by 20%. That's the power of compounding returns.
As this process continues, the numbers may start to get very big while your previous earnings start providing even more returns. In fact, $10,000 invested at a 20% annual return for 25 years would grow close to $1 million.
Of course, the most important piece of the compounding equation is time. Warren Buffett didn't build his fortune overnight — it took nearly 70 years for him to reach his current net worth. Now, most of us don't necessarily have another 70 years left on the clock. But the point is that the earlier you get in, the more years your money will have to compound...
Buffett Lesson No. 4: Solid Management and Clean Books
Warren once said, “It takes 20 years to build a reputation and five minutes to ruin it.”
For Buffett, part of not ruining your reputation means investing only in companies with reliable and ethical management. Of course, that has as much to do with protecting your reputation as it does with investing in solid companies.
Buffett has historically avoided investments in turnaround situations and untested management — not just to protect his image but also to limit risk. His strategy is to stick with proven winners, even if that means passing up companies with major upside...
Buffett Lesson No. 5: Recognize Mistakes and Changing Times
No one is a perfect investor — not even the much idolized Warren Buffett.
Throughout his career, Warren Buffett has continuously admitted to and learned from his mistakes. He once told the press, for instance, that he wished he'd never sold his huge stake in Walt Disney.
Buffett has also admitted that it was a mistake to trust his protégé David Sokol. Sokol failed to disclose a personal stake in special chemical company Lubrizol, which he built up shortly before recommending it to Berkshire Hathaway as a potential acquisition.
This guiding philosophy isn't just about knowing when you were wrong, though. It's also about realizing when the calls you've made in the past no longer apply — even if they've been incredibly successful to date.
Perhaps the best example of this kind of behavior is when Berkshire Hathaway once had a stake in Procter & Gamble that was worth billions. After sensing weakness in the company, Buffett finally decided to begin unloading shares.
Another example came up at a recent shareholder meeting when an investor asked Buffett about his thoughts on driverless cars in regard to car insurance. Buffett admitted that the technology could present a major threat to Berkshire subsidiary Geico. This was instead of stubbornly dismissing the potential disruption, which is what many investors tend to do with their portfolio darlings.
And as promised, here are Buffett's top 10 holdings for 2021...
- Apple Inc. (NASDAQ: AAPL): 40.7% of portfolio.
- Bank of America (NYSE: BAC): 13.1% of portfolio.
- American Express Company (NYSE: AXP): 7.6% of portfolio.
- The Coca-Cola Company (NYSE: KO): 7.4% of portfolio.
- The Kraft Heinz Company (NASDAQ: KHC): 4.4% of portfolio.
- Verizon (NYSE: VZ): 3.1% of portfolio
- Moody's (NYSE: MCO): 2.5% of portfolio.
- U.S. Bancorp (NYSE: USB): 2.5% of portfolio.
- Chevron (NYSE: CVX): 1.8% of portfolio
- General Motors (NYSE: GM): 1.4% of portfolio
Before we part, we'd like to extend a sincere thank-you for joining us here at Wealth Daily. We look forward to providing you with valuable investment research and commentary over the course of your subscription. Our core philosophy is that the more you know, the better you'll be able to take advantage of that knowledge to expand your wealth. We'll continue sharing our insights on how to boost your portfolio with flexible and safe investments.
Wealth Daily Research Team