For many people, investing in the stock market is the greatest wealth-building tool that exists, as the stock market has created some very wealthy individuals. While many people have had great success, no one comes close to the success of Warren Buffet, who is one of the wealthiest people in the world. He achieved all of his wealth through investing in the market and running a holding company that essentially built its wealth through the holding of other publicly traded companies. So, for any prospective investor who would love to duplicate Buffet’s success, here are five questions to ask Warren Buffet.
1) How do you start investing in the market?
Warren Buffet would suggest the common, but simple strategies to building is to invest in an S&P 500 index fund, preferably at least $10,000 to start. The S&P 500 represents 500 of the biggest publicly traded companies in the world, and index consistently shifts companies in and out of the index to maintain long term profitably given the nature of certain industries dying out and new ones coming to life. Over time, the S&P 500 has returned about eight to ten percent a year, and so he would recommend the power of time and compound interest doing a lot of the work for your initial investment and to never pull out.
2) What is a great way to yield big returns in the market?
After investing in an S&P 500 fund as a safety net, you can then take on some risk. While penny stocks are considered highly risky and dangerous, Buffet made a lot of his initial fortune in investing in penny stocks that had strong fundamentals. These days, you can find a lot of this information easily through what is insider trading to give secrets about companies that you may not always find publicly available. Buffet’s ability to see this early enabled him to buy shares of a company ultra-cheap and watched his portfolio grow significantly when the demand for those companies grew as well.
3) Why are dividends more powerful than capital gains?
Many stock experts would argue that in order to make more money in the stock market, you must invest in the right growth companies who reinvest profits rather than pay out dividends to shareholders. However, Buffet argues that for mature investors who have a significant portfolio, investing in companies with sustainable dividend yields and long term promise can yield just as good if not better performance long term in the market because of the power of compound interest.
The key is always to take any dividends and reinvest back into the company. This means that Buffet reached a certain point where he never had to find additional capital to grow his portfolio because he obtained so much capital from dividends. His portfolio could grow sustainably on that alone. A lot of this is covered in his book The Intelligent Investor.
4) What is the most important thing to consider in the stock market?
Warren Buffet would argue that time is your biggest friend in the market, and that simply put the longer your money is invested and remains untouched, the better off you will be. Buffet said that a $114 investment into the S&P 500 back in 1942 would be worth $400,000 today if you had left the money in the fund and reinvested all the dividends. This includes multiple wars, a few recessions, and constant fear the financial system would collapse. He argues that betting on America is the greatest thing for an investor to do, because of how resilient and produce the American economy is over a long period of time.
5) What is the main piece of advice to an investor for success?
The main piece of advice Warren Buffet would say is to invest in America, and not pay attention to anything else. The stock market swings because of a short term voting system, and people in their mind always believe one way or another the market is not reflective of current conditions. But in the long term, company fundamentals will move the price the right direction. For those who are patient enough, your money will yield promising returns.
