Warren Buffett Reveals the Simple “Trick” to Successful Investing and 3 Steps to Get There

The Oracle of Omaha says using these three steps will make an “enormous difference.” Any list of the greatest investors of all time would undoubtedly find renowned Berkshire Hathaway (BRK.A -0.85%) (BRK.B -0.71%) CEO Warren Buffett near the top of that list. The so-called Oracle of Omaha has led the company for more than five decades, and in that time, he has become the standard by which all successful investors are measured. Since taking the reins at Berkshire in 1965, his stock picks have increased (on average) about 20% annually and, in total, have surged an unrivaled 3,787,464%. So when the Oracle talks, investors listen. For those looking to replicate his track record of success, Buffett has advice on how to successfully build a nest egg for retirement, and it doesn’t require an accounting degree, advanced knowledge of economic principles, or sophisticated algorithms. Buffett suggests a simple strategy he believes “makes the most sense, frankly, all of the time.” Furthermore, the Oracle provides three simple steps that even the most novice investor can use to succeed.

1. Buy them all

Many people enjoy the process of investing, such as digging into the latest financial statements, trying to identify the most significant secular tailwinds, or simply getting in on the ground floor of a recently public company with a groundbreaking new product or technology. Most people, however, lack the time, expertise, or interest to make the process worthwhile. For the average person, Buffett recommends investing in an S&P 500 index fund, saying, “American business is going to do fine over time, so you know the investment universe is going to do very well.” Buffett also recommends buying an index fund, because it takes the guesswork out of investing. “The trick is not to pick the right company — most people aren’t equipped to do that — and plenty of times, I make mistakes. The trick is essentially to buy all the big companies through the S&P 500,” Buffett said. Owning an S&P 500 index fund gives investors access to the biggest companies in the country, so they don’t have to worry about missing out on a big winner.

2. Do it consistently

The second key to success, according to Buffett, is consistency. “Keep buying it through thick and thin,” he said. “Especially through thin.” Buffet went on to explain the human tendency to let emotions rule their investment decisions, which rarely ends well. “When you see bad headlines in newspapers, we say, ‘Well, maybe I should skip a year.’ Just keep buying it,” he said. By sticking to the plan, we can override our emotional nature. Committing to this consistency is the foundation of dollar-cost averaging. Buying the same amount at regular intervals means investors get more for their money when the market is down and less when it’s higher.

3. Do it in a very, very low-cost way

Buffett points out that in investing, “costs really matter,” and that’s true even when investing in an index fund. “If returns are going to be 7% or 8% and you are paying 1% for fees, that makes an enormous difference in how much money you’ll have by retirement,” he said. For context, fees of just 1% will reduce a $100,000 investment account by $1,000 each year. That amounts to $20,000 over 20 years and doesn’t even include the opportunity cost of the investment gains you missed. Even smaller amounts add up. Fees of just 0.5% cost $500 per year in the same account and $10,000 over two decades. The Vanguard S&P 500 ETF (VOO -0.08%) is one such low-cost index fund that tracks the performance of the 500 largest U.S. companies. Its goal is “to closely track the [S&P 500 index] return” and acts as a proxy for the overall U.S. stock market, holding companies from each of the 11 market sectors. And with an expense ratio of just 0.03%, it is one of the lowest-cost S&P 500 index funds available. The top 10 holdings in the Vanguard ETF are:

1. Apple: 7.5%
2. Microsoft: 7.0%
3. Amazon: 3.1%
4. Nvidia: 2.7%
5. Alphabet (Class A): 2.1%
6. Alphabet (Class C): 1.8%
7. Meta Platforms: 1.7%
8. Berkshire Hathaway (Class B): 1.7%
9. Tesla: 1.6%
10. UnitedHealth Group: 1.3%

As you can see from this list, the Vanguard ETF gives investors access to the biggest blue chip stocks out there — without all the hassle.

What this means for investors

For investors who don’t have the time or inclination to buy individual stocks, Buffett offers a way to benefit from the ongoing rise of American businesses. To recap Buffett’s three steps to successfully build a nest egg for retirement:

1. Invest in an S&P 500 index fund.
2. Do it consistently.
3. Do it in a very low-cost way.

Given Buffett’s long, distinguished track record of success, investors could do worse than following his advice.