Focusing on fundamentals and having patience can help investors build lasting wealth in the stock market.
Warren Buffett will be stepping down as chief executive officer of Berkshire Hathaway (BRK.A 0.82%) (BRK.B 0.80%) before the end of the year. And on Nov. 10, in a letter to shareholders, Buffett also said he won’t be speaking at Berkshire Hathaway’s annual meetings from now on.
Buffett’s witty musings will be missed, but he didn’t leave folks completely out to dry.
Here are some gems from the letter that may be particularly impactful for new stock investors.
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Luck can be unforgiving
For decades, Buffett has been vocal about the role that luck played in his life, personally and professionally. To quote the latest shareholder letter: “In many cases, our leaders and the rich have received far more than their share of luck — which, too often, the recipients prefer not to acknowledge. Dynastic inheritors have achieved lifetime financial independence the moment they emerged from the womb, while others have arrived, facing a hell-hole during their early life or, worse, disabling physical or mental infirmities that rob them of what I have taken for granted.”
It’s hard to build wealth from scratch, especially for folks who can’t invest as much early in life due to the burden of student loans or the sole responsibility of saving for a down payment on a house without family help. And even if those goals are achieved, it can take decades to save for retirement. But as Buffett points out, some folks are born with a lifetime of financial independence — which is a massive advantage.
As Motley Fool research, based on Census Bureau data and compiled by Apartment List, points out, just 33% of millennials at age 30 are homeowners, compared to 42% for Gen X, 48% for baby boomers, and 55% for the silent generation. With the cost of living on the rise, elevated interest rates, and relatively unaffordable housing, luck is arguably playing a greater role in financial security than in the past.
The lesson is that big breaks and luck can make financial planning a lot easier. Without a safety net, it’s scarier to take risks — like rock climbing without a harness, which is why it’s a good habit to invest for the long term so you can keep your emotions in check during a broader sell-off.
Playing an unlucky hand
Instead of blaming bad luck for a harder road, a better approach is to accept luck’s role in financial health and not compare yourself to others. Instead, focus on what you can control.
If you’re a young investor facing challenges such as student loans or seemingly impossible home ownership, you can find solace knowing that time can turn even mediocre gains into an impressive nest egg.
If a 25-year-old invests $6,000 per year ($500 per month on average) for 40 years at a 10% rate of return, they would end up with over $2.66 million by the time they are 65.
By comparison, if a 45-year-old saved 7 times more per month, or $42,000 per year, at a 10% return, they would still end up with less — $2.41 million.
Even if you’re new to the stock market, have student loans, and won’t be getting help on upcoming big purchases, you can rest easy knowing that you still have a major advantage over folks with a shorter time horizon. Even saving a little can go a long way. Starting with nothing and saving just $100 per month for 40 years at a 10% rate of return results in over half a million dollars. That’s the incredible power of compounding for you.
Having patience and accepting volatility are paramount for unlocking the stock market’s life-changing long-term gains. Even excellent stocks, like Berkshire Hathaway, can sometimes undergo steep sell-offs for reasons beyond the company’s control.
In the shareholder letter, Buffett reminded investors that despite Berkshire’s relative “safety,” it is not immune from sell-offs: “Our stock price will move capriciously, occasionally falling 50% or so as has happened three times in 60 years under present management. Don’t despair; America will come back and so will Berkshire shares.”
By staying even-keeled and investing in quality companies, you can help limit common investing mistakes that are especially harmful when markets are at all-time highs.
Learn from mistakes by choosing good role models
Instead of dwelling on good or bad luck or past mistakes, Buffett encouraged investors to focus on the future. Even at age 95, Buffett strives to learn new things and be better — knowing that perfection is impossible.
Don’t beat yourself up over past mistakes — learn at least a little from them and move on. It is never too late to improve. Get the right heroes and copy them.
This lesson can be applied to portfolio management. The goal of investing isn’t to be right on every idea or get a hit every at bat. Rather, the objective is to get enough hits throughout the game of life so that when opportunity strikes, you can compound the return with multiple runs.
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Don’t try to get rich quick
For decades, Buffett’s letters have helped investors filter out market noise and stay grounded no matter what the economy is doing. Buffett’s latest letter is a reminder that it’s ok to take a contrarian approach to the stock market.
A lot of money is being made on red-hot artificial intelligence growth stocks right now. Some of these companies are going up for the right reasons, while others are filled with hot air. But regardless of what’s driving the market, you don’t have to feel like you need to invest in these companies to make money. Rather, it’s better to align your holdings with your conviction by investing in companies rather than tickers and numbers on a screen.