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Matt Lillywhite

4 Investing Rules That Made Warren Buffett A Billionaire

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Matt Lillywhite
Matt Lillywhite
 2021-05-07

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A lot of people want to get rich overnight. But unfortunately, that’s a terrible strategy that often fails. The reason? Data published by Entrepreneur Magazine shows that the average millionaire took eight years to accumulate wealth.

So, what’s a better solution? Identify the investing habits of extremely wealthy people and implement them into your own life. And a brilliant case study is the Billionaire, Warren Buffett. He’s one of the most successful investors of all time and is also the CEO of Berkshire Hathaway, a $245.5 billion holding company.

Here are four investing rules that made Warren Buffett a billionaire:

1) Only Purchase Stocks You’ll Feel Comfortable Holding For The Next 10 Years

During an interview on CNBC, Warren Buffet compared the process of buying stocks to purchasing a farm. He said, “Nobody buys a farm based on whether they think it’s going to rain next year. They buy it because they think it’s a good investment over 10 or 20 years.”

He’s right. It’s often better to make investment decisions based on the opportunity for long-term growth as it’s incredibly difficult to consistently time the stock market.

2) Do Your Due Diligence To Avoid Losing Money

According to Investopedia, “Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration.” Or put more simply, it’s doing your homework before you invest thousands of dollars into a stock or index fund.

Warren Buffet only invests in stocks that he truly understands. After all, having long-term conviction in a stock will make it much easier to hold during recessions and bear markets.

Of course, there will always be a potential risk of losing money if a stock going to zero. However, doing your due diligence will make you aware of any obvious red flags. For example, it’s probably a good idea to avoid investing in companies if they have SEC violations or any other type of sketchy history.

3) Recognize That Diversification Can Be Dangerous

Of course, it’s important to avoid putting all of your eggs in one basket. However, it’s also a stupid strategy to invest in so many stocks that you can’t pay attention to each one.

That’s why Warren Buffet says to study a couple of industries in extreme depth, so you can use that knowledge to identify opportunities and generate significant amounts of profit.

As an example, look at how Warren Buffet picked investments for Berkshire Hathaway. The organization has invested in banking, food, travel, and several other industries that Warren Buffet has carefully studied.

Before investing in anything, do your research, and try to avoid extreme diversification. After all, the gains from one industry could easily be canceled out by the losses from another. And thus, your portfolio would stay consistently stagnant.

4) Focus On Businesses That Are Likely To Perform Well In The Future

Warren Buffet says you should “be fearful when others are greedy, and be greedy only when others are fearful.” In other words, buy as many assets as you can whenever the market crashes, as the prices will be much cheaper.

Let me give you an example of how you could implement this strategy in the real-world. In March 2020, many businesses were forced to close. This prompted a massive sell-off of stocks.

But let’s say you purchased $10k worth of Cheesecake Factory on 20th March 2020 at a price of $15.84. The stock price quickly increased as the lockdowns eased. So if you held the stock until the end of March 2021, your $10k investment would have grown to over $36,000.

Look at where businesses are likely to be in the long-term future. Then, use the data you have to decide whether you shall invest (or not). Chances are, you’ll be able to take full advantage of several great buying opportunities.

Warren Buffet followed the above investing rules to become an incredibly successful billionaire (over $100 billion) who is widely respected by people around the world. To recap:

  • Do your due diligence to avoid red flags.
  • Look at where businesses are likely to be in the future.
  • Make investment decisions based on long-term conviction.
  • Avoid extreme diversification by specializing in a couple of industries.

Unfortunately, the chances of getting rich quickly are slim. But if you study and follow the habits of successful investors, the probability of getting rich (slowly) will exponentially increase. So what are you waiting for?

Start now.

Disclaimer: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any major financial decisions.