In fact, Warren Buffett built his fortune through a few clear rules. In this article, we explain six simple rules he follows to grow his money.
Rule 1: Invest in Great Companies with Durable Advantages
Furthermore, Buffett always looks for high-quality companies with strong brands or other durable advantages. For example, his $1 billion investment in Coca-Cola in 1988 was a bet on Coke’s global brand and pricing power. As a result, he still holds Coca-Cola shares today and enjoys their steady dividends. Moreover, Buffett paid a premium for See’s Candies in 1972 because loyal customers and pricing power would ensure reliable profits.
Rule 2: Only Invest in Businesses You Understand
Also, Buffett insists on staying within his “circle of competence.” Importantly, he only invests in companies whose businesses he clearly understands. For example, he largely avoided tech stocks for years because they were outside his expertise. Eventually, he viewed Apple as a familiar consumer brand, seeing the iPhone’s loyal user base and strong cash flow. In fact, Buffett famously says never to buy a business you cannot explain and understand.
Rule 3: Focus on Value, Not Just Price
Importantly, Buffett focuses on a company’s true value rather than its stock price. Specifically, he follows Benjamin Graham’s “margin of safety” rule by buying shares well below what he believes they are worth. Moreover, he often says it’s better to “buy a wonderful company at a fair price” than a mediocre one at a bargain. For example, he avoided the 1999 dot-com craze and waited for solid companies. Additionally, Buffett even sat on cash instead of overpaying during bubbles.
Rule 4: Think Long Term and Reinvest Gains
Moreover, Buffett is famous for his long-term mindset and plans to hold a great business indefinitely. For example, Berkshire’s stakes in Coca-Cola and American Express, bought decades ago, have grown steadily. Indeed, this approach delivered about 20% annual returns for Berkshire.
Rule 5: Stay Disciplined and Buy in Downturns
Additionally, Buffett stays calm when others panic and often buys when prices are low. He advises being “fearful when others are greedy and greedy when others are fearful”. For example, during the 2008 crash Buffett invested in companies like Goldman Sachs and GE while many ran away. By contrast, he held cash when stocks were high. This disciplined patience—waiting for the right opportunity—is key to his strategy.
Rule 6: Protect Your Capital (Never Lose Money)
Finally, Buffett’s top rule is never to lose money. Additionally, he always requires a margin of safety and avoids big risks. In practice, this means he won’t invest unless the deal clearly protects his cash. For example, he refused highly speculative stocks and sat on cash until solid investments appeared.
Collectively, these six rules form a clear strategy to build wealth. Furthermore, following Buffett’s approach helps your money grow steadily with less risk. For example, Buffett’s investments in Coca-Cola, See’s Candies, and Apple illustrate his principles. In short, following these rules helps your investments compound. Buffett’s roughly 20% average annual return since 1965investing.com shows how this approach beats the market.
