Advice from Warren Buffett to help you become an ISA millionaire
Warren Buffett has built a fortune of nearly $100bn by investing in stocks, so it's clear he knows a thing or two about the topic.
He has been investing since the 1950s, and with around seven decades of experience under his belt, when Buffett issues investment advice, it always pays to listen.
With this being the case, I've picked out the three Buffett quotes below which have had the most significant influence on me personally as an investor.
These are not get-rich-quick tips, but essential nuggets of advice that have helped me improve my performance. And hopefully, these quotes can help you as well.
Rule number one
"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."
Buffett's first rule of investing is to make sure he never loses money. To this end, he only ever invests in high-quality businesses that have a definite competitive advantage, or what he calls a 'moat'.
These are companies such as Unilever and Reckitt Beckinser, which produce some of the world's most recognised consumer products and have a solid reputation among customers for quality. These businesses might not be growing as fast as some AIM market upstarts, but they have churned out returns for investors year after year and over the long term, the risk that you will lose money by investing with them is tiny.
Money makes money
"My wealth has come from a combination of living in America, some lucky genes, and compound interest."
As investors, the best tool we have available to us to grow our wealth is time and the power of compound interest.
Put simply, compound interest is the interest earned on an investment when money is reinvested, which can be an incredibly powerful tool over time. For example, if you invest £100 in Royal Dutch Shell today and reinvest dividends (current yield of 5.9%) every year for 10 years, your investment will be worth £180 after a decade (assuming no share price appreciation or dividend growth).
However, if you don't reinvest the dividends, you will only see a total return of £159 (once again assuming no share price appreciation or dividend growth). By reinvesting the income from Shell, the investment will be worth 13% more after a decade with no extra effort on your part.
The longer you keep reinvesting, the bigger the gap becomes. Over 40 years, you would earn 210% more by reinvesting.
Don't try and be clever
The third and final quote I want to highlight is, I believe, one of the most informative: "Risk comes from not knowing what you're doing."
Investing is all about balancing risk and reward, and over his career, Buffett has realised that the most significant risks investors face is not market volatility, but self-inflicted ones. These include buying a share without understanding what a company does, or buying complex financial instruments with no idea how they work.
If you make these mistakes, you could end up breaking Rule No. 1, which will ultimately impact your ability to make the most of the power of compound interest. In other words, if you want to succeed as an investor, you need to do your research. Over time, the profit you generate from better decisions should more than compensate you for the extra effort.
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Rupert Hargreaves owns shares of Unilever and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Royal Dutch Shell B. 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.