Warren Buffet is a skilful investor. If he were to start over in a completely new country with nothing, he would still find a way to make money or, better still, build wealth in less than a decade.
He is a great investor. It’s a skill he has improved over many decades.
Making money has nothing to do with talent. Successful people learn the skills, rules, fundamentals and principles over time and apply them consistently for a long time.
When it comes to making money, skill matters more than hard work. Skill comes first. You need to know what to do, when to do it and how to put money to work to build wealth. You can work as hard as you want, but you will end up with nothing without the right money skills.
Don’t get me wrong, making money is hard work, but you will improve your odds of success if you understand the first principles of making money and apply them instead of working as hard as you can just because you can.
Master money sense
If you lack money sense, you can work as hard as you want, but you won’t make significant progress. The most successful people know this; they are lifelong learners and rely on intelligent money-making experts to put their money to work.
The millionaires among us have accumulated years of experience in a few domains. But investing in real estate, equities and owning capital is very common among them.
“On average, millionaires invest 20 percent of their household income each year, writes Ramit Sethi in his book, “I Will Teach You to be Rich”.
You can make money from many domains if you know how to navigate them. But you don’t have to pursue every niche to make money.
“Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow.” writes George S. Clason, in his book, “The Richest Man in Babylon”.
Learn the timeless principles of creating wealth
Choose a niche you deeply care about and learn a ton of knowledge (the right ones) from those who are actually making it and apply them in a way that works for you.
If you are interested in making money, hone your skill fast; making money online is saturated, but these niches still work — writing, niche blogging, podcasting, building valuable products or whatever you find enjoyable.
It’s not so much about what you choose; it’s about what you can sustain for an extended period to benefit from compounding. It’s also about creating or building things. Becoming a creator is puts you in a better position to make money that compounds over a long period.
Don’t just rent your time, put your money to work
If you just rent your time, you will make a living. If you want to build wealth, learn to create or build something people care about. Something that can help people solve problems, save time, save money, work smarter or lead a happier life.
“With very few exceptions, anybody who has attained any level of financial success has created something. It might be a book, a CD, an invention, or a Web site. Look around you,” Robert Pagliarini in his book, “The Other 8 Hours”.
If you can build something, invest in a great company that solves a practical pain. You can’t start making money without the right skills. So, learn from those making money in industries you care about.
You can learn valuable money-making skills from Pat Flynn, Naval Ravikant, Charlie Munger, Ramit Sethi, Ray Dalio and dozens of others who apply money rules differently but still make a lot of money every day.
I choose writing almost a decade ago. Since then, I’ve evolved, reinvented and upgraded my approach to making money.
Today I make money from many sources, but income from writing is still my most significant source. I’m learning a lot about putting the principle of compound interest to work lately.
If you are serious about making money, learn everything you can about compound interest
It’s the best way to put your money to work. Robert Kiyosaki is right, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
Making good money (beyond making a living) is not about renting your time — trading time for monthly wages. The good news is, you can do both by putting a percentage of your salary to work.
Even if you earn a few thousand dollars every month, you can still invest at least 10 percent of it in a good investment product. Don’t forget to learn about index funds. It’s one of the best ways to win the stock market game over the long term.
“The winning formula for success in investing is owning the entire stock market through an index fund and then doing nothing. Just stay the course, writes John C. Bogle in his book, “The Little Book of Common Sense Investing.”
You can make money (fast and slow) if you are ready to learn the first principles. Invest in yourself first. Learn from great books and intelligent people. It’s almost like learning a new language.
Get the basics right first. Read “The Almanack of Naval Ravikant: A Guide to Wealth and Happiness” (you can even download it for free). I’m currently reading the hard copy.
Learn the roots of making money before you learn about the branches. And when you are done learning, apply your skills by creating value for people and then double down on the skills you need to create more value for many more people.
Buy what you’ll never sell
The investing game takes time to master. Like any game, it has its own rules but people apply them differently based on their goals.
I don’t invest in individual stocks at the moment — I don’t have the patience and the psychological resilience to make the most of it.
I tried it last year, and it didn’t end well. Plus, the stress of checking how the stocks are performing daily was a total waste of my mental energy.
I intend to invest for a long time, so I’m sticking to a strategy that works for me without micro-management.
Early this year, I decided to get back to what I’ve always learned is the best way to build wealth over a long period — index funds. Today, every stock I own is a low-cost index fund.
The individual stock experiment didn’t work out. But I will tell you what else I’ve been doing for my investment account for the last 3 years — hold on to my Vanguard index fund account.
The good news is, I’ve made a 49% (so far) return on my initial investment at Vanguard over the last 3 years. It still blows my mind when I look at that account. How is that possible. How did it survive the pandemic?
Learn to play the long game
Warren Buffett once explained their fundamental investment strategy in a letter to shareholders, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
Before Buffett invests in a company, he spends about 80% of his time reading about the company performance, profit margins, debt, how long they’ve been in business, among other things. And when he finally makes the call, he holds for as long as possible.
Want to know how he picks individual stocks? “Buffett follows the Benjamin Graham school of value investing, which looks for securities whose prices are unjustifiably low based on their intrinsic worth,” writes the Investopedia team.
I intend to buy and hold a few different index funds for as long as possible. I want to spread the risks and minimise costs. Ultimately I want to use Buffett’s approach to build long-term wealth.
Buying good investment products and holding on to them for a good number of years works most of the time. It’s not 100% effective, but it delivers if you allow compound interest to work in your favour.
Warren Buffett recommends it to typical investors.
“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.),” he said in his 2013 letter to shareholders. It’s famously called “90/10” rule.
The value of time
“Over the years I came around to the view that we’ll have a high chance of meeting all of our family’s financial goals if we consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound,” says Morgan Housel in “How I Invest My Money.”
The massive risk of trying to outperform the market is not worth it, so I would rather pay a small fee to the intelligent people who know what they are doing and accumulate small gains for as long as possible.
I can’t afford to be a bad investor, especially when investing for retirement, so I will always choose index funds over individual stocks.
In the next decade, I intend to invest 70% of my money available for investment in low-cost index funds, 10% in a few crypto assets and about 20% in cash. The cash part leaves me more than enough for emergencies. It gives my household more flexibility. I’ve started learning about angel investing — I may invest in a few quality companies down the line.
Whilst investing for the long-term, I will be balancing my portfolio where necessary, but my choice will always be index funds.
Buy and hold means you hold a good balance of diversified assets that fits your investment goals. This long-term investment game works for me but may not work for you.
The choice to buy the index and hold on for as long as possible is a no-brainer for me. But it’s personal. Your investment goals determine the choice of product. Active investors try to time the market to maximise their returns.
“Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game,” writes Housel in his book, Psychology Of Money.
Buying and holding excellent or futuristic assets can deliver all-weather returns without psychological stress. It can generate higher yields over the long-term. It doesn’t work for everyone, but it has its benefits if you choose quality investment products, diversify your portfolio and learn from the best.