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3 Important Financial Lessons From the World's Richest Man

The Motley Fool logo The Motley Fool 21-09-2016 Matthew Frankel, Selena Maranjian, and Adam Galas

Bill Gates© World Economic Forum/Flickr Bill Gates

Source: World Economic Forum via Flickr.

People follow the habits of billionaires closely, and why not? These people have made boatloads of money, so maybe there are a few things to be learned. We decided to take a closer look at Bill Gates to see how the world's richest man approaches his finances and life in general. Here are three lessons we think you can learn from him.

1. Diversification

Matt Frankel: One lesson investors could learn from Bill Gates is the importance of diversification. Despite what many people believe, most of Gates' wealth is not in the form of Microsoft (NASDAQ: MSFT) stock. In fact, since he's sold many shares over the years, Bill Gates isn't even Microsoft's single largest shareholder anymore.

Most of Gates' wealth is in his investment company, called Cascade Investment, LLC, whose portfolio looks more like that of Warren Buffett than what you might expect from a tech billionaire. Gates makes a wide variety of investments through Cascade, including stock and venture capital investments, but just a few of the biggest publicly traded ones that we know about include AutoNation, Canadian National Railway, Ecolab, Deere, Liberty Global, and Waste Management. Additionally, Gates owns a large chunk of Berkshire Hathaway stock, essentially expanding his portfolio to include all of Buffett's stock picks.

The point is that even if you make a lot of money from one investment, it's unwise to leave all your eggs in one basket -- doing so leaves your wealth extremely vulnerable. Because of Gates' smart diversification of his wealth, he isn't too dependent on the success of any one of his investments, including the company he famously founded.

2. Long-term focus

© AP Images

Selena Maranjian: You can learn a lot by listening to what successful people have to say, and Bill Gates is no exception. One of his statements sheds light on a concept critical for successful wealth-building: a long-term focus. In his 1996 book, The Road Ahead, he said, "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

The statement is telling, because in a variety of ways, Gates' company, Microsoft, significantly underestimated unfolding changes. The company was famously slow to see the value of the Internet, and it also lost ground being late to appreciate how rapidly the mobile world would grow, not to mention cloud computing and open-source software. Gates has clearly learned the lesson he imparts the hard way.

Gates's statement is instructive for investors in several ways. First, of course, it reminds us to not be short-sighted when it comes to companies we invest in or think about investing in. We should think critically and broadly about them and their futures, lest we be caught unaware when they don't keep up with change or position themselves well to capitalize on it.

We should also bring a long-term view to our investments' performances. Don't buy a stock expecting it to pop within a year or two, because anything can happen in the stock market over short periods. Do think about what kind of growth you might expect over the coming decade. Look for companies that aren't just mispriced slow-growers with a 25% upside in them, but ones that have great long-term growth potential, that can multiply your wealth many times over – over the long haul.

3. Understanding why we want to make money

© Corbis

Adam Galas: An important lesson investors can take away from Bill Gates' success is that Gates has a strong understanding of his long-term financial goals. He doesn't invest just to stay atop the Forbes Global 400; rather, he understands that money is a powerful tool that allows us to fulfill our dreams and aspirations.

In his case, Gates is passionate about making the world a better place through philanthropy via his Bill and Melinda Gates foundation. Though he needn't ever work another day in his life and could pretty much buy anything his heart desires, his portfolio decisions are based on what is best for the ultimate objective that leaves him feeling most fulfilled.

Understanding the reason we want to make money is important, because not only can it help us to live richer, happier lives, but it can also keep us from making foolish, short-term decisions that can result in a large permanent loss of capital.

For example, say you're 50 years old and investing to secure an income source for your retirement that's 15 years away. Your time horizon and goals mean that you probably want to avoid riskier stocks such as Tesla Motors or SolarCity in favor of more conservative blue-chip dividend names such as Kinder Morgan or ExxonMobil.

Most importantly, during times of market volatility, as we've recently seen, your long-term goal's emphasis on safe and growing income means you're less likely to panic and sell at a loss. Rather, the falling share prices and rising yields you can now obtain represent an even greater income stream in your golden years. 

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