Compounding magic: What if Warren Buffett can teach you about investing

Warren Buffett, the Oracle of Omaha, is often celebrated as one of the greatest stock pickers of all time. But while most investors don’t have his eye for undervalued companies or the patience to read annual reports cover to cover, they can learn from the principles that shaped his extraordinary wealth.

If you’re investing in mutual funds, here’s the good news: many of Buffett’s core investing philosophies apply well to the world of long-term, goal-oriented mutual fund investing.

Let’s break them down.

  1. Start early: Time is the real magic of compounding

Buffett once said, “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” The earlier you start investing, the more compounding works in your favour.

You don’t need to pick stocks like Buffett to harness this magic. A monthly Systematic Investment Plan (SIP) in a diversified equity mutual fund, say ₹5,000 at a 12% annual return, can grow to ₹1.5 crore in 30 years. Stretch it to 40 years, and you’re looking at nearly ₹5 crore.

  1. Stay the course: Avoid knee-jerk reactions

Buffett’s holding period philosophy, “Our favourite holding period is forever”, is a lesson in patience. He doesn’t sell just because the market dips.

Similarly, mutual fund investors benefit from staying invested through market cycles. Redemptions during downturns often lock in losses and miss out on the recovery. It’s essential to stay invested – the market rewards patience, not panic.

  1. 3. Diversify smartly: Know your limits

Buffett is famously selective with his investments, often betting big on a few businesses he deeply understands. For most retail investors, that’s not feasible. Mutual funds, however, offer built-in diversification, spreading your risk across sectors and companies.

This is especially helpful for retail investors without the time or skill to analyse stocks independently. Hence, don’t try to be Buffett. Simply use mutual funds to diversify and reduce risk.

  1. Be disciplined: Automate your wealth-building

Warren Buffett didn’t get rich overnight. His fortune grew steadily because he stuck to his principles and kept investing. SIPs mimic that same discipline. They take emotion out of the equation, encourage regular investing, and benefit from rupee cost averaging.

Remember, discipline builds wealth, and you can use SIPs to automate consistency. An online compound interest calculator can be used to figure out how small contributions grow over time.

  1. Minimise costs and taxes

Warren Buffett is a fan of keeping investment costs low. In fact, he famously advised his own estate to invest in low-cost index funds after his death.

You can do the same with mutual funds, especially passively managed or tax-saving schemes like Equity-Linked Savings Schemes. Holding investments long-term also minimises your tax outgo thanks to favourable long-term capital gains rates for equity investments.

Ending note

You don’t need to pick stocks or run a billion-dollar company to build serious wealth. A retail investor can apply Buffett’s timeless principles, such as patience, consistency, and long-term thinking, using mutual funds as the vehicle and leveraging the power of compounding.

So, do not procrastinate, begin today, and let compounding work its magic!

The post Compounding magic: What if Warren Buffett can teach you about investing appeared first on Daily Excelsior.

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