Warren Buffett has long been a venerated icon in the finance space. The Oracle of Omaha, as he’s fondly known (the nickname is a nod to his practically uncanny ability to accurately predict the stock market), became a millionaire in 1962. Crossing the million-dollar income threshold may not be that big of a deal today — not when we have multibillionaires flying above us in private jets — but back then, earning that much wealth on your own was a pretty extraordinary feat.
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Over the decades, Buffett’s wealth has only expanded and, now, he’s among those aforementioned multibillionaires with a private jet. He’s one of the wealthiest people on the planet, with a net worth of $147 billion, as of Jan. 22. Buffett has built most of his vast fortune through investing, which is why pretty much everybody with investing smarts keeps a close eye on what Buffett is doing. It’s no exaggeration to say that Buffett has not only changed the game of modern investing but, in a sense, helped create it. Let’s look at four key ways Warren Buffett has forever changed the way investors think, according to financial experts.
Buffett does not play around. When he buys into a company, he does so for the long haul. This is how he makes so much money in compound interest. He buys in early (ideally) and then lets time do much of the rest of the work.
“He buys and holds stocks for the long term (at least five years),” said David I Kass, clinical professor of finance at University of Maryland, Robert H. Smith School of Business. “Since acquiring Berkshire Hathaway in 1965, Buffett has achieved a compounded annual rate of return on the stocks in its portfolio and the businesses it has purchased of approximately 20% per annum as compared to the S&P 500 (with dividends included) of 10%. Berkshire’s largest holdings consist of Apple (owned since 2016), Bank of America (2011), American Express (1965) and Coca-Cola (1988).”
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Buffett is a strong believer in quality over quantity. He’s ultra picky and you should be, too.
“On average, Buffett makes one major addition to Berkshire’s portfolio less frequently than once per year,” Kass said and highlighted that Buffett invests in companies selling below their intrinsic value which incorporates expectations of growth in long run cash flow and the calculation of a “margin of safety,” as well as in those “with a durable competitive advantage or moat. Examples include Apple and Coca-Cola.”
Buffett believes in investing with passion, but only within one’s “circle of competence.” This means to invest solely in companies you understand — even if that means passing up what looks like an incredible investment opportunity.
“He has been criticized for this quality in the past, most notably during the internet craze in the late 1990s,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance, Heider College of Business, Creighton University. “Buffett was blasted in the press for foregoing investing in the wildly popular tech and telecommunications stocks that were soaring during the internet craze. It culminated in a cover story in Barron’s asking, ‘What’s Wrong, Warren?’ We all know what happened next. The dot.com crash exonerated Buffett as the high-flying tech and telecommunications stocks returned to earth.
“The lesson here is to invest in what you understand,” Johnson said. “I am amazed that people will invest in companies like Nvidia and can’t even explain what the company does, much less what it is worth.”
Buffett hasn’t just changed how investors think in an emotional sense too. He’s taught them to not freak out and bail on an investment when the economy gets rocky. He’s also taught them not to go bonkers with excitement and buy, buy, buy when things are going great. We know now, in part because of Buffett’s shining example, to be patient.
“Buffett has often said that his preferred holding period is forever,” Johnson said. “The greatest advantage of an investor is time. The wonders of compounding make a relatively small investment grow exponentially over time like the proverbial snowball rolling downhill. That is, time in the market is much more important than timing the market.”
Johnson noted that the popular biography of Buffett written by Alice Schroeder, “The Snowball: Warren Buffett and the Business of Life,” is titled after a Buffett quote: “Life is like a snowball. The important thing is finding wet snow and a really long hill.”
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This article originally appeared on GOBankingRates.com: 4 Ways Warren Buffett Has Forever Changed the Way Investors Think