By Tom Simmons
In any practice of life, be it boxing or painting, those who want to be the greatest look to learn from those who’ve already become the greatest. By watching legends in action, you can also study what they do and determine why they do it and apply it to your own practices. Investing is no different. If someone wants to be a great investor, they must study the moves of those who have been most successful. And one of those greats is Warren Buffett.
Buffett, who was just recently named the world’s richest man by Forbes magazine with a net worth of $62 billion, is regarded as one of the greatest American investors. Born August 30, 1930 in Omaha, Nebraska, Buffett’s father was a stock broker, giving him early exposure to investing and business. He attended Columbia Business School to study under the famous economist and investor Benjamin Graham. By 24, Buffett was working under Graham on Wall Street. By 32, Buffett had combined seven existing partnerships into one. By 35, he took control of manufacturing firm Berkshire Hathaway. This was all less than halfway into his career.
Aside from being what could be the world’s most frugal billionaire, living off an annual salary of less than $200,000, watching Warren Buffett’s actions can help teach up-and-coming investors some serious lessons. While the grand majority of investors would be happier with stocks that got them quick money, Buffett’s strategy runs more along the lines of the maxim, “slow and steady wins the race.” He only invests in businesses that have proven to be sure things by researching their histories. Rather than looking to make quick cash in an economic bubble that will inevitably pop, Buffett chooses investments with less volatility.
Another lesson to be learned from Buffett’s strategy is compounding. Compounding looks at how the value of an investment can increase immensely in the long run, rather than how quickly it will pay off in the short run. Using the rule of 72 (dividing 72 by an investment’s annual rate of return), Buffett came up with an accurate formula which determined how long it would take an investment’s value to double. Buffett’s annual return in the first half of his career was 29%, which meant according to the rule of 72, that he was doubling his value every two and a half years. Now pause a moment and extrapolate that. In ten years, with that kind of return rate, $5,000 becomes $40,000, or $20,000 becomes $160,000! Compounding’s subtle method in making an investor a lot of money over an extended period of time is something Warren Buffett mastered.
And, naturally, like any other great legend, Warren Buffett can teach you the value of a strong work ethic. Buffett’s name would not be so easily remembered had he not worked hard to get what he has now. Through his ambition and diligence he managed to exercise his practices to their greatest potential. This is the one universal characteristic known in all of history’s greatest heroes.
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