Learning a new skill is always scary at first because there's so much you don't know. And learning how to become a successful investor is even scarier, because you're putting your own money at risk.
If you have a wise and seasoned mentor, however, the journey can be less frightening. And if you're new to investing, there's no better mentor than billionaire Warren Buffett, the quirky and brilliant CEO of Berkshire Hathaway, to guide you.
Buffett is in the business of making investors richer, not teaching novices. But you can make him your honorary mentor by following four of his time-tested tips, which can help you build a million-dollar retirement portfolio.
Warren Buffett. Image source: The Motley Fool.
Buffett tip No. 1: Give your money time to grow
Becoming a millionaire takes time, and unless you have an extremely wealthy relative who plans to leave you a cool million upon passing, you're going to have to earn it yourself. But it won't happen overnight -- you need to invest the money in the stock market and wait for it to grow.
And grow it will: The S&P 500, which is a model for the overall stock market, has generated an average annual return of 10% over the past 50 years.
Whatever investment path you choose, it's important to stick with it. When you purchase a stock, plan to hold it for a minimum of five to 10 years. Buffett is known for saying, "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes," and "Someone's sitting in the shade today because someone planted a tree a long time ago."
You're just starting to plant your money right now, so give it time, and it might eventually provide enough shade to have that million-dollar retirement portfolio that you seek.
Buffett tip No. 2: Collect passive income with dividend stocks
The stock market can be extremely volatile, which causes fear in the hearts of both experienced and beginner investors. But as you wait for your money to grow, you can get paid by purchasing stocks that pay dividends.
What's a dividend, you ask? It's a payment to a company's shareholders of a percentage of the business' profits.
When you buy a dividend stock, you have two ways to make money: one, when the stock price increases as the company becomes more valuable, and two, via a dividend payment. If a company pays a dividend, you'll be paid no matter if the stock price is increasing or decreasing. And you don't have to do anything -- it will automatically be sent to your brokerage account.
Buffett is a huge believer in buying dividend stocks and has been richly rewarded. As he said in his 2022 annual letter:
The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays. All Charlie [Munger, who is Buffett's vice chairman at Berkshire] and I were required to do was cash Coke's quarterly dividend checks. We expect that those checks are highly likely to grow.
American Express is much the same story. Berkshire's purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion [as the Coke shares did]. Annual dividends received from this investment have grown from $41 million to $302 million. Those checks, too, seem highly likely to increase.
You won't be receiving millions of dollars in dividends because you aren't investing as much capital as Buffett does. But you'll be getting free money, which will help you achieve your retirement goals more quickly.
Buffett tip No. 3: Invest in strong businesses
When you're choosing stocks in which to invest, it's important to look for strong businesses. But if you're a beginner, it's hard to know which ones are.
According to Buffett, one thing to look for is a huge moat: "A truly great business must have an enduring moat that protects excellent returns on invested capital. "
A moat is nothing more than a competitive advantage. The business is like a giant castle, and the moat that surrounds it protects it from being attacked by competitors.
Buffett's favorite companies have great moats. Costco (COST 0.90%), the wholesaler where everyone loves to shop, has one because it provides a discounted model that consistently makes money. While other companies have tried, none have had the enduring success of Costco. A company with a wide moat also will have the stability and financial fortitude to withstand any economic challenges that come its way.
Buffett tip No. 4: Buy when others are selling
This idea makes a lot of sense: If people are selling, stock prices will go lower and you'll be able to purchase great companies for even better prices. The problem is that this is easier said than done. When the stock market feels like it's crumbling all around you, it's hard to press the buy button.
Yet Buffett advises that THAT's the time to buy: "Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
Everyone wants to buy merchandise on sale, so why not stocks? Again, from Buffett: "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."
The bottom line is that when stocks are popular, you're not going to get a good price. So you have to wait until one of those strong businesses with a wide moat is out of favor so you can get it on sale.
Look, nobody becomes a millionaire overnight, not even Warren Buffett did. Although he has been investing since he was 11 years old, he didn't reach millionaire status until his 30s (and now that he's in his 90s, his net worth is over $110 billion).
By having patience and focusing on the long term, buying strong businesses and dividend stocks, and waiting for stock market bargain sales, you'll be well on your way to a million-dollar retirement portfolio. And you can tell everyone that your mentor is none other than Warren Buffett!
