Warren Buffett’s smartest investment wisdom
To celebrate the recent addition of Berkshire Hathaway (BRK.A) to Hatch, we’ve asked Regan Pearson to look at some of the wisest words from CEO and investing legend Warren Buffett.
Imagine investing $1,000 today, happily going about your life and, 54 years’ later, waking up to almost $24 million.
It could happen! As CEO of Berkshire Hathaway(BRK.A) Warren Buffett has delivered a near-mythical 20.5% annual compounded return for shareholders since 1964. That’s double the return of the S&P 500 index (including dividends) over the same period.
With great returns comes great wisdom
Fortunately for us, Buffett has been generous with sharing the insights and wisdom he has collected along his journey.
I’ve picked out some of the smartest things the Oracle of Omaha has said on wealth, investing and life that we can apply ourselves.
Start investing early – extraordinary wealth takes time to grow
"Someone's sitting in the shade today because someone planted a tree a long time ago."
Building wealth can feel painfully slow, especially when we’re young and starting out. There will be storms and dry spells along the way. However, as time slips by the growth from small, early investments can dwarf the initial outlay.
If there is one lesson we can learn from Berkshire’s monster returns, it’s to start investing early to leverage the incredible power of compounding over time.
To beat the market, own businesses with pricing power
“Basically, the single-most-important decision in evaluating a business is pricing power.”
One reason Berkshire’s returns have been so dominant is because of the focus on pricing power. Businesses that have the ability to raise prices without losing customers can reinvest and grow at above-average rates of returns for years.
Pricing power usually comes from a unique competitive advantage. Keep an eye out for businesses with exceptional technology like Apple (AAPL), strong brand recognition like Coca-Cola (KO) or a powerful network effect like American Express (AXP).
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Start investing nowKnow why you own a business
"Write down the reason you are buying a stock before your purchase. Write down "I am buying Microsoft at $300 billion because..." Force yourself to write this down.”
It’s hard to overstate the wisdom of clarifying your investment thesis before you make an investment.
Having a clear reference point lets you identify when performance moves away from your expectations. It also helps to avoid toxic ‘thesis creep’. This is when you find yourself rationalising a stock’s place in your portfolio when you really should sell it.
Invest where it counts the most – in yourself
"The most important investment you can make is in yourself."
Sure, money is great. But for real wealth Buffett emphasises investing in the important things. Everything good in our lives can be compounded. Our fitness, our relationships and our knowledge all get stronger and more rewarding as we invest in them year after year.
I think we’d all be happy to wake up in 54 years with that kind of wealth.
Ready to see Buffett’s wisdom at work? Check out Berkshire Hathaway Inc. (Class A) shares, available on Hatch.
Hatch contributor Regan Pearson has no position in any of the stocks mentioned.