Warren Buffett: How to invest your first $10,000

So whether you have $10,000 to invest or 10 million, you're going to learn a ton from this video.

Interesting fact about investing: Legend Warren Buffett that you may not already know. Despite currently being a billionaire many times over, Warren Buffett's first stock purchase cost him less than $120 at the age of 11. Buffett bought three shares of a company called City Services Preferred for around $38 per share. He has come a long way since those humble beginnings, and his current net worth is in excess of 00 billion. He sits at the top of a company currently valued at over $600 billion.

Now there's an important lesson in the story: you can start investing like Buffett even if you aren't a billionaire like him. In fact, you can get started with just a few hundred or thousands of dollars in savings. So in this video, we're going to listen to Buffett talk about how he would invest if he only had $10,000 to his name. Now there's a ton of useful advice packed in this video, so you're going to want to stick around until the end because Buffett's advice is super helpful on how to get started growing your portfolio.

Now let's jump into the video.

Start young. Charlie's always said that the big thing about it is we started building this little snowball on top of a very long hill. So we started at a very early age and rolling the snowball down. Of course, the snowball, the nature of compound interest is it behaves like a snowball of sticky snow. The trick is to have a very long hill, which means either starting very young or living very to be very old.

I would do it exactly the same way if I were doing it in the investment world. I mean, if I were getting out of school today and I had $10,000 to invest, I'd start with the A's. I would start going right through companies, and I probably would focus on smaller companies because I would be working with smaller sums, and there's more chance that something is overlooked in that arena.

Charlie has said earlier, it won't be like doing that in 1951 when you could see through and find all kinds of things that just leapt off the page at you. But that's the only way to do it. I mean, you have to buy businesses, or little pieces of businesses called stocks, and you have to buy them at attractive prices. You have to buy into good businesses, and that advice will be the same 100 years from now in terms of investing. That's what it's all about.

One of the biggest takeaways from this clip of Warren Buffett is the concept of compound interest. There's an old saying that often gets attributed to Albert Einstein: "Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't pays it." While some people question whether the quote wasn't fact from Einstein, the power of compound interest is unquestionable.

In fact, Warren Buffett's entire life and career is a perfect example of the amazing impact compound interest can have on building wealth. Listen to this little known fact: Buffett didn't even become a billionaire until he was in his 50s. In fact, 99% of Warren Buffett's net worth was earned after his 50th birthday. Let me say that again: 99% of Warren Buffett's net worth came after his 50th birthday.

There's no debate that Warren Buffett has been a great investor since he was 24 years old working for his mentor, Ben Graham, in New York. However, part of the reason Warren Buffett is so wealthy and so well-known as a result is because he has continued to invest successfully well into his 80s and 90s.

Take a look at this chart of Warren Buffett's net worth by age. This visual shows the wonders of compound interest at work. Notice how at age 59, Buffett's net worth was $3.8 billion. This is a $2.4 billion increase from the 1.4 billion he was worth when he was 56. Put another way, Buffett gained more net worth over this three-year period than he gained in his first 56 years of life.

Also, notice how Buffett gained over $30 billion in net worth from the age of 83 to the age of 91. Over these 8 years, his net worth increased at an average rate of nearly $4 billion a year. He gained more net worth in just one year than his first 59 years of life combined. It sounds so crazy, but this is how compound interest works. The gains in wealth you see from compound interest are exponential, not linear.

Let's see what kind of impact compound interest can have on a $10,000 portfolio. Meet our friend Jack. Jack is 25 years old and recently learned about investing and wealth building through a wonderful YouTube channel called Investor Center. Okay, all jokes aside, make sure to subscribe to the channel if you aren't already because it's the goal of this channel to help make you a better investor. Our community has grown to 150,000 people, and it would be even better with you as a part of it.

With that out of the way, let's get back to Jack. Let's say Jack's $10,000 portfolio is invested over a 40-year time period at a 10% average annual return. Just for reference, 10% is considered the long-run average annual return of the U.S. stock market. How much do you think Jack will have at the end of the 40 years? Keep in mind this is all without Jack contributing another dollar.

Maybe his portfolio was able to grow to $50,000, or if he got really lucky, maybe $100,000. Well, those numbers aren't even close. Jack would have over $450,000. Jack was able to grow his $10,000 portfolio to a portfolio approaching half a million dollars purely just by having compound interest work its wonders.

There are two variables that determine how powerful the results you will experience from compound interest are: time and return. The key to truly building wealth is to maximize both of them. This is why one of Warren Buffett's pieces of advice on how to grow a $10,000 portfolio is to start early.

Going back to our example with our friend Jack, look what happens if we increase the time period by 10 more years. The investment portfolio grows from $450,000 all the way to nearly $1.2 million. However, don't get discouraged if you aren't super young. The most important thing is to get started as soon as possible.

The other variable that determines how large your portfolio will grow is your annual return. Let's say Jack is able to get a 12% average annual return instead of 10%. It's only two additional percentage points, so naturally, you would think it wouldn't make a huge difference. Oh, but it does! With the 12% return, Jack's portfolio grows to $930,000, more than double the size when the return was 10%. Just for fun, let's see what happens when we increase the annual return to 15%. The portfolio shoots up in value to nearly $2.7 million.

This shocked me when I learned how what seems like a small difference in annual returns can have an incredible impact on your portfolio size. So this leads us perfectly into the next part of the video: how we can follow Buffett's advice on how to maximize your returns.

Buffett has said on multiple occasions that if he was managing a smaller amount of money, he would be able to produce annual returns of 50% or greater. Remember how powerful 10%, 12%, and 15% annual returns were in our compound interest example? Well, imagine how quickly your wealth would compound if you were able to grow it at 50% a year.

There is one key change that Warren Buffett would make to his investment strategy that would help him generate those incredibly high returns: he would focus on smaller companies. You may be asking yourself, "Well, why smaller companies?" The answer to that question is shockingly simple: less people are paying attention to them. As an investor, in order to generate high returns, you have to find companies that are extremely undervalued.

As companies get larger, naturally, they get more attention from professional and retail investors. And as the number of people that are following a company increases, the odds of that company becoming extremely undervalued decreases. Well, that makes sense when you think about it. Imagine you are looking to buy a house or rent an apartment; you show up to tour the property, and there are already a thousand other people there also touring the property. What do you think your odds of getting a good deal are? Not very high due to the increased competition you're facing.

Compare that to if you showed up at the same exact property, but let's say the owner forgot to advertise the property, and you just somehow happened to be the only one that showed up to look at the house. What do you think your odds of getting a good deal are? Definitely a lot higher than when you were competing with a thousand other people also looking for a house.

This same concept applies to investing in stocks. You want to focus your attention on stocks that aren't closely followed and get relatively little attention. More often than not, these almost always tend to be smaller companies. Famous investor Peter Lynch also talked about another advantage of investing in small companies: on average, it's easier for small companies to grow than it is for large companies.

Peter Lynch talked about it like this: imagine you're looking at two companies: one of them does $20 million a year in profit, and the other one does $20 billion. Which one do you think will have an easier time growing their profit by 10 times? Odds are it will be much easier for the first company. Going from $20 million a year in profit to $200 million is an increase of $180 million, but going from $20 billion in profit to $200 billion is an increase of $180 billion.

There's only so many people in the world that can buy a company's product before the company runs out of potential customers. This is why it's difficult for incredibly large stocks to grow as quickly as smaller companies.

Now you may be asking, "Okay, this sounds good, but how can I find smaller companies?" Well, I have just the solution for you: it's called the stock screener. A screener helps you sort companies based on a variety of characteristics. One of these characteristics that you can search by is company size.

Just going to the stock screener I found online, you can set a filter for companies of a certain market cap. In this particular one, I set the filter to companies between $50 million in market cap and $500 million. Now I have a list of companies that are between the size range I set in this filter. I can scroll down and look for names that potentially look interesting.

If I want to take this one step further, I could also filter by price to earnings, or PE ratio. Let's say I want companies that are trading at a PE ratio of less than 10 but also greater than 1. I set the PE ratio to greater than 1 because I don't want companies that are losing money and have negative PE ratios to show up on this list. Now I have a list of companies that is further filtered down. These companies are both small and may be potentially undervalued.

This is what I would do if I was looking for stocks to invest in. I would scan this list until I found something that was worth more attention, and then I would begin researching the stock.

So there we have it. I hope you guys enjoyed this video, and make sure to like this video and subscribe to the channel if you aren't already because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon.