Warren Buffett is recognised as one of the world's leading investors. He has built enormous wealth through the power of investing in businesses. I'm using some of his key lessons to help me become rich over time.
Buffett has built his company Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB) into a world leader with investments including insurance, railroads, banking and Apple Inc (NASDAQ: AAPL).
While his choice of investments has been part of his success, there are a couple of important factors that I think have enabled Buffett's wealth growth.
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Investing when the share market is down
It's obvious to say, but I think hefty market declines can have the biggest impact on people's wealth, depending on how investors behave.
If people decide to sell when share prices have dropped, it means they're locking in the negative returns their portfolio has experienced. We could call that buying high and selling low.
Just look at what's happened to the global share market over the past year with the Vanguard MSCI Index International Shares ETF (ASX: VGS):
I believe that investors need to be patient during volatility – crashes regularly happen, so we should expect them. So, just holding onto good ASX shares during downturns seems like a smart move to me.
But, buying shares during a market decline could be a very good move. The lower the purchase price, the bigger the gains over time, if that particular investment does go up.
Warren Buffett advice about market volatility
Buffett once said: "Be fearful when others are greedy, and greedy when others are fearful."
He also gave an excellent analogy about why it's good to remain optimistic about investing when share prices drop:
To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household. When hamburgers go up in price, we weep. For most people, it's the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
A third example of his advice regarding price falls comes from his 1997 annual letter to shareholders:
If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Foolish takeaway
Choosing good investments is important. But it's no good if investors sell when the market goes through volatility. Missing out on good prices could be a mistake as well. It takes patience to enable investments to compound and grow over time.
I used the COVID-19 crash as a big opportunity to invest and I'm using the current lower prices to buy a number of attractive ASX shares at cheaper prices than we saw in 2021. By using — and living by — Warren Buffett's advice, I think it makes it more likely that I can become wealthy.
