I always remember someone telling me that the difference between being rich and being wealthy is knowledge. The point being that a wealthy person has the knowledge to make more money. One way I’m aiming to generate long-term wealth is via my knowledge of investing in the stock market. To this end, I hope to benefit from the stock tips of Warren Buffett, one of the greatest investors of our generation with a net worth of over $100bn.

Picking stocks that I understand

Buffett was born in 1930, so has experienced countless stock market recessions and boom periods. This experience comes into play with his first stock tip. He’s quoted as saying that “the important thing is to know what you know and know what you don’t know”.

This takes a couple of times of reading to understand it! The point is that in the long run, I’m better off investing in stocks that I can understand and appreciate. For example, I might be an expert on cars. Logically, I’d probably be able to identify hallmarks of a good car manufacturer and potentially buy a promising stock as a result. On the other hand, I would be unlikely to invest in a Chinese domestic restaurant stock. 

By acknowledging where my strengths lie (and don’t lie), I should be able to be a more successful stock picker than simply buying whatever everyone else does.

Buying for the long term

A second stock tip that ties in with generating wealth is another quote from Warren Buffett. He said that “Wall Street makes its money on activity. You make your money on inactivity”.

If I buy and sell stocks very frequently, I’ll incur higher transaction fees from my broker. In the long run, this also could be damaging for my overall portfolio. Some studies have shown that investors net higher returns from letting a stock run its course rather than trying to time the market from frequent trading.

One reason for this is that it’s impossible to perfectly time the market. This can cause me to lose out on potential upside if I’m sitting in cash and waiting for a dip that might never come.

A final stock tip from Buffett

In a speech at Columbia University, Buffett advised: “Don’t pass up something that’s attractive today because you think you will find something better tomorrow.”

From my position as an investor, missed opportunities are very frustrating. Especially when I’m trying to build wealth, if I pass up one attractive stock pick a year for the next decade, it’s a lot of potential profit missed out on.

Therefore, if I see a good stock at an attractive price, I need to seize it. I won’t be able to buy every stock I like, as I have financial limitations. But the principle is there, and valid.

Overall, Warren Buffett has many great stock tips and pointers. By trying to put them into practice, I can hopefully increase my long-run wealth.

The post 3 stock tips from Warren Buffett for generating wealth appeared first on The Motley Fool UK.

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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.