If you’re looking for inspiration when it comes to investing principles, you would be hard-pressed to find a better blueprint than Warren Buffett’s strategy. The “Oracle of Omaha” has sage advice for everything from buying stocks and index funds to managing cash flow and investing in companies. However, if you want to know how to invest like Buffett, you should first look at what he does with small amounts of money.
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Your long-term investment strategy doesn’t have to revolve around one financial windfall, it can be a series of smart tactics with tiny sums. Here are six ways Buffett would advise you to invest small to gain big.
Start Investing Early
Buffett, CEO of Berkshire Hathaway, emphasizes the importance of starting to invest as early as possible. The power of compound interest is significant, and the earlier you start, the more your money can grow. Buffett likens it to rolling a snowball down a hill — the longer the hill, the bigger the snowball gets.
No matter your risk tolerance, the margins for safety on smaller investments are wider and can help you weather any financial storm you may cross. As he once said, “The trick is to have a very long hill, which means either starting very young or living … to be very old.”
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Discount-Dive in the Stock Market
When investing, Buffett knows how to scout for the best deals and recommends looking for businesses that are selling at a discount. This means finding companies that are undervalued by the market but have strong fundamentals and growth potential.
This strategy is known as value investing, and it’s how Buffett built his fortune and the fortune of many Berkshire Hathaway shareholders. He advises to search for “businesses that are selling at a discount and hold them for the long term.” This advice has led to some of Buffett’s biggest investments over time.
Focus on Small Companies
Before investing in top stocks like Bank of America or Coca-Cola, Buffett has mentioned that his best period as an investor was when he was just starting out with small sums of money. This is because he could take more risks and invest in smaller companies with higher growth potential.
He said, “If you are working with a small sum of money … and are willing to do the work, there is no question that you will find some things that promise very large returns compared to what we will be able to deliver with large sums of money.”
Don’t Worry About Short-Term Fluctuations
Buffett advises against worrying about short-term fluctuations in stock prices or the ups and downs of S&P 500 index funds. Instead, focus on the long-term potential of your investments.
If you’ve invested in a good company at a good price, short-term market movements shouldn’t concern you. He famously said, “If you’re going to do dumb things because your stock goes down, then you shouldn’t own stock at all.”
Be Prepared To Work Hard
Investing, even with small sums of money, requires effort and research. Buffett warns that investing should never be easy, and that you need to be willing to do the work to find great investment opportunities in order to grow your wealth or build a successful company.
He and his partner Charlie Munger believe, “There’s too much chasing easy money.”
Diversify, but Not Too Much
While diversification is important to manage risk, Buffett believes in focusing on a few great opportunities. He has said, “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
So it’s not that you shouldn’t diversify, but you should be intentional when you do. You don’t want to put all your nest eggs in one basket, but you also don’t want to spread your wealth too thin. As Buffett himself has shown, it’s not about how much you start with — but how wisely you invest it.
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This article originally appeared on GOBankingRates.com: Warren Buffett: 6 Ways To Invest Tiny Sums of Money
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