Wealth creation is an important part of financial planning to ensure future financial health and well-being.
Warren Buffet, a well-known active stock picker has achieved significant long-term results with his company Berkshire. See my Coffee Talk post on Berkshire versus S&P 500 for more details.
- What makes him so extraordinary?
- What if we could get some insights into his long-term wealth creation approach?
- Researchers from the New York University and AQR Capital Management have exactly done that with their paper “Buffett’s Alpha”.
The paper found several key ingredients to Warren Buffet’s success in wealth creation and wealth management. According to the authors:
- He buys stocks that are “safe” (with low beta and low volatility), “cheap” (i.e. value stocks with low price-to-book ratios), and high-quality (meaning stocks that are profitable, stable and growing with high payout ratios).
- He managed to stick to his principles and continue operating at high risk even after experiencing some ups and downs that have caused many other investors to rethink and retreat from their original strategies.
Warren Buffet is long-term focused and uses leverage to amplify his investments. In addition, he uses his skills and conviction to navigate with leverage, surviving rough periods without being forced into a fire sale.
To produce further excess returns, Warren Buffet’s operation includes insurance and reinsurance businesses. This provides him with a consistent and cost-effective source of financing to leverage his stock selection ability. 36% of Warren Buffett’s liabilities consist of insurance float with an average cost below the T-Bill rate.
Despite these insights, it does not mean that long-term wealth creation is a walk in the park.
As explained previously, “Wealth creation via long-term investments” is incredibly powerful and critical to your financial health and wellbeing. We can enhance our wealth creation strategy by incorporating some of Warren Buffet’s ingredients.
The following Goggling articles will provide you with more details on using leverage to amplify your investments: “Debt, gearing, leverage and money management – the simple truth” and “Mortgage debt levels in Australia: debt management”.
Hence, you are the master of your own destiny.
The earlier you start the wealth creation process, the easier and the more beneficial it becomes.
At the very least, start by thinking about your end game “Here’s to an Early Retirement: The ultimate option of not having to work” and deploy “Forward thinking: Contingency plans and protection for your family”.