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3 Warren Buffett rules I’ll be following in 2021 to grow my wealth

Edward Sheldon, CFA
·4-min read
close-up photo of investor Warren Buffett
close-up photo of investor Warren Buffett

Warren Buffett is the greatest investor of all time. Over the years, he’s built up a net worth of nearly $90bn from investing.

What I love about Buffett is his investment strategy is very simple. There’s nothing about his approach that you or I can’t replicate. With that in mind, here’s a look at three simple Buffett rules I plan to follow in 2021 to grow my wealth.

Warren Buffett rule #1: buy stocks when others are fearful

One of Warren Buffett’s most powerful pieces of advice is that the best time to buy shares is when others are fearful. He says this is the time to get greedy.

This is an approach I’ve followed since I started investing and it’s always worked well for me. For example, in the stock market crash this year, when other investors were panicking, I bought ASOS shares at 1,100p, JD Sports Fashion shares at 320p, and PayPal stock at around $90. Today, these shares trade at 4,500p, 800p and $235 respectively.

Buying when others were fearful has boosted my wealth significantly. I’m hoping that in 2021, we see more great panic-selling-related buying opportunities at some stage.

I’ll point out that I don’t only invest when others are fearful. I drip-feed money into the market at regular intervals. However, when fear levels are high, I load up on stocks. To quote Buffett: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Rule #2: invest in highly-profitable companies

One of the secrets to Warren Buffett’s success is he invests in businesses that are very profitable. While other fund managers are looking at companies’ earnings growth, he is focusing on profitability metrics such as return on equity (ROE) and return on capital employed (ROCE).

Companies that have consistently high ROE and ROCE ratios, such as Apple (Buffett’s top stock) earn a significant return on the money invested in the business. This means they have more money to reinvest for the future, which leads to more growth.

In recent years, I’ve been focusing more on stocks with high ROE and ROCE ratios and the results have been excellent. For example, my shares in dotDigital – a highly profitable UK tech company – have risen from about 25p to 150p. In 2021, I’ll be continuing to focus on highly-profitable companies in the same way Buffett does.

Rule #3: look for winning companies with ‘economic moats’

Finally, another rule Warren Buffett puts a lot of emphasis on is finding companies that have competitive advantages, or ‘economic moats’ as he likes to say. This could be a strong brand, a technological advantage, a patent, or plenty of other things. The key is that it puts the company in a strong position and protects profits.

The most important thing is trying to find a business with a wide and long-lasting moat around it,” Buffett has said. “Why is that castle still standing? And what’s going to keep it standing or cause it not to be standing five, 10, 20 years from now?

Some companies I own shares in that have strong competitive advantages include Apple, Amazon, Diageo, Unilever, Microsoft, and Rightmove. These all have powerful brands and strong market positions. As a result, all have been very good long-term investments.

In 2021, I’ll be continuing to invest in these types of winning companies.

The post 3 Warren Buffett rules I’ll be following in 2021 to grow my wealth appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in ASOS, JD Sports Fashion, PayPal, Apple, Amazon, Diageo, Microsoft, Unilever, dotDigital and Rightmove. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, Microsoft, and PayPal Holdings. The Motley Fool UK has recommended ASOS, Diageo, dotDigital Group, Rightmove, and Unilever and recommends the following options: long January 2022 $1920 calls on Amazon, short January 2022 $1940 calls on Amazon, and long January 2022 $75 calls on PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020