At their annual meetings, Berkshire Hathaway’s shareholders have the opportunity to pick CEO Warren Buffett’s brain on any number of topics.

However, one investor who attended the conference in 1999 cut right to the chase. “Mr. Buffett, how do I make $30 billion?” he asked.

As always, the Oracle of Omaha conveyed complicated theories in simple terms. Here are the three crucial rules that helped the 93-year-old accumulate a massive fortune and could help ordinary investors too.

Start young

Buffett’s best advice for investors is to get started as early as possible. He has a simple metaphor to explain his wealth-building strategy. “We started with a little snowball on top of a very tall hill,” he said. “We started at a very early age in rolling the snowball down, and of course, the nature of compound interest is that it behaves like a snowball.”

Indeed, the length of Buffett’s career is a key piece of his enormous wealth. He bought his first stock at the age of 11. He’s now 93 years old and still actively investing. In fact, the majority of Buffett’s wealth was accumulated after he turned 65. In 1999, his net worth was just $30 billion. Today, it’s nearly four times greater at $116 billion, as per Bloomberg.

Staying invested over a long period of time is crucial. Ordinary investors can best harness the power of compounding by starting as early as possible.

Circle of competency

Tom Watson Sr., the founder of IBM (NYSE:IBM), once said, “I’m no genius. I’m smart in spots — but I stay around those spots.” That’s the mantra Buffett has applied to his investing too.

Investing is risky, and Buffett has mitigated that risk by sticking to industries he understands. Much of his portfolio is focused on either simple consumer businesses or financial companies.

Ordinary investors can similarly reduce risk by avoiding stocks in businesses that are too complex to analyze and evaluate. Stick to your circle of competency and don’t speculate.

If you want to expand your circle of competency, you may want to seek advice from a trusted professional.

Search for small companies

Buffett said that if he were starting again today with $10,000, he would focus first on small businesses. “I probably would be focusing on smaller companies because I would be working with smaller sums, and there’s more chance that something is overlooked in that arena,” he said at the shareholder meeting.

In his early days, the billionaire investor focused on extremely small companies that would be considered small-caps. He bought a tiny furniture company in Nebraska in 1983 when it was still expanding across state lines. He acquired See’s Candies when it made just $4 million in annual profits in 1972.

These small businesses were overlooked and had more room to grow. That means Buffett had a chance to buy them cheap and watch them expand. This is also true now. Small-cap stocks were roughly 30% cheaper than large-cap ones in the final quarter of 2023, according to analysis by BNP Paribas. They have also historically outperformed large caps, especially after recessions and over longer periods of time, says MSCI. It’s advisable to diversify your portfolio and add some small caps to your watch list.

 

MoneyWise