Get rich and retire early by investing like Warren Buffett

10 gems of wisdom from the world's greatest investor that could help to change your fortunes

Warren Buffett's Berkshire Hathaway bought 75 million more Apple shares in the first quarter of 2018. Nicholas KAMM / AFP

Every investor dreams of being the next Warren Buffett, the self-made US billionaire who bought his first stock age 11 and is now worth more than $93.4 billion, according to Bloomberg.

Mr Buffett is the most famous investor in the world and the third-richest person on the planet, but he is admired for more than his money.

The so-called “Oracle of Omaha” is renowned for his folksy words of wisdom, which have made him a cult figure to many. The 87-year-old is also a generous philanthropist, giving away more than $27bn in the past decade.

His investment vehicle Berkshire Hathaway has grown at an annual rate of just over 20 per cent since 1964, more than double the average annual return of 9.7 per cent on the S&P 500 index of top US stocks.

If you had invested $10,000 in the company in 1964 you would now be worth more than $240 million, multimedia financial-services company The Motley Fool calculates.

Mr Buffett may have started young but don't despair, he made 99 per cent of his wealth after his 50th birthday. The following 10 gems could help make you richer, and potentially save you a lot of money as well.

1 Rule No 1: never lose money. Rule No 2: never forget rule No 1

Steven Downey, a chartered financial analyst candidate at Holborn Assets in Dubai, says this is key to Mr Buffett’s down-to-earth approach. “Everyone dreams of doubling their money overnight but most successful investors built their wealth over a long time through shrewd investing and minimising large losses.”

Early losses can easily derail your long-term plans, Mr Downey says. “Losing, say, Dh10,000 hurts far more than earning Dh10,000 feels good, and this can make it hard to stick to your investment plan.”

Big losses are also hard to recover. “If your portfolio falls 50 per cent, you have to generate a 100 per cent return simply to get back where you were. If you lose 80 per cent, that rises to 400 per cent.”

You cannot do much about a stock market crash aside from be patient and wait for share prices to recover, but you can avoid taking undue risks, say, by going all in on one company or cryptocurrency, Mr Downey says. “Invest for the long term, stay diversified, manage risk and do not get greedy.”

And never forget it.

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2 If you buy things you don’t need, you will soon sell things you need

Mr Buffett is renowned for his modest and frugal living. Despite his vast wealth, he still lives in the same five-bedroom home he bought in Omaha, Nebraska in 1956, for $31,500. 

Mr Downey says there is a lesson here for UAE expatriates, who can get carried away with their tax-free salaries. “It is easy to be seduced into a lavish and debt-laden lifestyle, as you go all out for that new Mercedes or Rolex watch. By all means enjoy yourself but also develop a budget, build a financial cushion in case something goes wrong and invest every month for your long-term future.”

If you live for today and slap the cost on a credit card, tomorrow could be tough.“You may get torn to pieces by the interest, and find yourself in deep debt and unbearable stress. That is not a winning strategy.”

3 Risk comes from not knowing what you're doing

Too many investors pick up a ragbag of stocks and funds that took their fancy at some time or another, without really knowing why.

Others fall prey to commission-hungry independent financial advisers who prey on expatriates, selling expensive and inflexible 25-year offshore investment bonds that swallow most of their money. Those are the type of mistakes you make when you don't know what you are doing.

Steve Cronin, the founder of non-profit UAE investment community Wise, says amateur investors should keep it simple by investing in an exchange traded funds (ETFs).

ETFs passively track a vast spread of global indices with rock bottom charges. Over the longer run they will beat three quarters of active fund managers, and you will hand over far less in fees.

Mr Cronin suggests starting with a global fund such as the Vanguard FTSE All-World UCITS ETF. “This gives you huge diversification with nearly 3,000 stocks across 47 countries, for an annual fee of just 0.25 per cent a year.”

Shares will always carry a degree of risk, but this way you know what you are doing.

4 Be fearful when others are greedy and greedy only when others are fearful

This is the most famous Buffett quote of all and with good reason, says Tuan Phan, a board member of Common Sense Personal Finance and Investing, a non-profit community of UAE investment enthusiasts. "Greed and fear are the two dominant investor emotions. If left unchecked, they tempt us to do things that may damage our long-term wealth."

Too many investors follow the herd, buying stocks when everybody else is buying, selling when everybody sells.

Mr Phan says a good example is the market crash during the financial crisis. “Those who panicked and sold banked massive losses while those greedily buying stocks at depressed prices can now look forward to an early retirement.”

Keep your emotions in check. Avoid getting over excited on the way up, or too panic-stricken on the way down.

5 Our favourite holding period is forever

There is a big difference between speculation and investing, Mr Phan says. “Investing involves buying an asset for a share of future profits, speculating involves buying an asset in hope of selling it for a higher price to someone else.”

Wealth is generated from compound growth and interest over time, rather than trying to time the market, he adds. “You want to be holding a productive asset such as a dividend stock for as long as you possibly can.”

Mr Phan says most ordinary investors lack the time, knowledge or skill to successfully pick individual stocks and shares as Mr Buffett does. “For them a globally diversified ETF is the best option. Buy and hold for years, preferably decades, reinvest your dividends, avoid panic selling if markets crash and finally, retire early.”

6 In investing, it is not necessary to do extraordinary things to get extraordinary results

Devesh Mamtani, the head of investments and advisory (financial markets) at Century Financial Brokers in Dubai, says investing should be as boring as watching paint dry, so avoid chasing the latest fad. “It isn’t easy, especially today, when you hear stories of speculators tripling their money on the latest cryptocurrency.”

Investing in a portfolio of low-cost ETFs may be boring but should prove far more rewarding in the longer run.

Buying a hot stock tip from a friend or colleague is exciting, until your money goes down the drain. “Whenever you get tempted ask yourself this: ‘Is your colleague smarter that Warren Buffett?’ That should give you the answer.”

7 Only when the tide goes out do you discover who's been swimming naked

There are times when making money from investing seems like the easiest thing in the world, for example, during the dot.com bubble of the late 1990s, or the property boom before the financial crisis.

Mr Mamtani says even poor quality assets can make money at these times. “It takes a downturn to distinguish between the good and the lucky.”

It is the same with your portfolio. “Almost anybody can make money in a bull market, it is only when the market turns that you see its true resilience.”

You need to ensure your investments are properly balanced, Mr Mamtani says. "Are you willing to live with lower returns to reduce volatility? Could you manage your debts if your income drops? These are the questions you should ask when the tide is still rising, afterwards it may be too late."

8 Beware the investment activity that produces applause, the great moves are usually greeted by yawns

Investors need to ignore everyday swings in stock markets and other assets, and the media hubbub surrounding them, says Gordon Robertson, the director of the Me Group of businesses in Dubai. “Also tune out financial advisers hyping the latest hot investment product or mutual fund. It is all short-term noise.”

Instead of buying the best performing asset class, such as shares, bonds, cash and property, Mr Robertson suggests buying them all in equal portions.

“Then once a year, reinvest the profits from your best performers into the weakest, to return your portfolio to its original balance. ETFs let you do this cheaply.”

Markets are cyclical, and last year’s winners often become this year’s losers, and vice versa.

Mr Robertson’s figures show that somebody who invested $100,000 in 1996 and repeatedly reinvested their gains in last year’s best performing asset would have just $229,183 after 20 years. “If they had rebalanced their portfolio by investing in the weakest they would have $376,000 instead.”

This approach may induce yawns at first, the applause comes much later.

9 Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future

Nobody can predict the future, not even Mr Buffett.

Tom Anderson, a chartered wealth manager at Killik & Co, who has clients in Dubai, says Mr Buffett prefers “value investing”, which involves examining the intrinsic value of a company by poring over its financial documents and statements, rather than making a big calls on market movements.

Then he buys and holds, ideally forever. It is time in the market that counts, rather than timing the market.

That way you can forget what the forecasters are saying, and let the future take care of itself.

10 Remember that the stock market is a manic depressive

Mr Anderson says if anything, Mr Buffett is being kind, as the stock market is punishingly bi-polar. “It can demonstrate the depths of despair and unbounded optimism in a single trading session, driven by panic and greed.”

Mr Buffett likes companies that have delivered a positive return on equity for many years, have relatively low debt, strong profit margins, unique products and, ideally, shares temporarily trading at a discount. 

“This enables him to shield his investors from the mood swings of the wider market.”

Stock markets may be manic in the short run, but in the longer run history shows they beat almost every other asset class. That is what made Mr Buffett so rich.