It’s uncommon for anyone to hit 90 years of age.
Warren Buffett, our favourite grandfatherly investing guru, has just hit this milestone.
The newly-minted nonagenarian has just blown the candles into a new decade and is still hale and hearty.
Living for so long has one clear advantage, and that is to be able to compound your wealth over the long-term.
Buffett is successful because he understands the power of investing in great businesses and letting his money grow over time.
Because of his discipline, patience and focus, we can learn a lot from him on how to improve our investment techniques and habits.
Here are three powerful lessons gleaned from the Oracle of Omaha.
A wonderful business needs time to shine
As the saying from Warren Buffett goes – Time is the friend of the wonderful business, the enemy of the mediocre.
A great business can continuously reinvest its earnings to generate a high return on equity.
Over time, the business becomes more valuable as it builds up its competitive moat and strengths.
However, that can only happen if we are patient as investors.
Time is needed for this growth to take place, and that should be a key pillar of your investment psychology.
Impatience and selling too early can only serve to ruin this virtuous cycle.
This is the reason why you should invest for the long-run.
In the short-term, share prices bounce up and down based on investors’ sentiment.
But over the long-term, they reflect the quality and growth of the underlying business.
As a business grows larger over time, its improved financial performance will be reflected in a rising share price.
The bonus here is that dividends usually rise in tandem too, providing a double bonus for the astute investor.
Focus on risks, not just rewards
When things are going well, it’s easy to focus on the rewards and gloss over the risks.
The neglect of the risks can be extremely hazardous to your wealth.
As the COVID-19 pandemic has shown, businesses can swiftly go from hero to zero as operating conditions take a sharp turn for the worse.
Buffett says the rule number one in investing is “Don’t lose money”. Rule number two is not to forget rule number one.
This demonstrates the kind of mindset you should have when deciding how to deploy your money.
Being prudent and weighing both the risks and rewards ensures you don’t get caught flat-footed when things go wrong.
While it’s impossible to completely avoid losses (yes, even Buffett makes mistakes), the idea is to minimize the probability of losses and to limit their extent.
Aim for wonderful, rather than mediocre, businesses
One classic piece of advice from Buffett is to “buy wonderful companies at a fair price, rather than fair companies at a wonderful price”.
You should be willing to pay more if the business is truly high-quality, versus one that is simply mediocre.
Yet, too often, investors are not willing to cough up a little extra at the time and end up lamenting not owning a great company that grows for decades.
On the other hand, mediocre businesses may be going for a song, but these are companies you should avoid.
Over a long period, it is the wonderful businesses that can continue to grow and soar, while the average ones may just chug along.
Strong businesses are also better equipped to handle crises such as pandemics and downturns, compared to the mediocre companies that may fizzle out and die.
In other words, think of it as paying a bit extra for peace of mind.
Get Smart: Wisdom for the ages
Buffett imparts investing advice through his numerous memos, released through his Berkshire Hathaway (NYSE: BRK.B) annual reports.
These nuggets of wisdom are timeless and can help you to become a much better investor.
However, lessons are only useful when you take them to heart and imbibe them.
This process takes time, but if done correctly, you will end up with a more robust process, as well as a larger amount of wealth.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
