Few would argue with the statement that Warren Buffett is one of the greatest investing and business minds in the world, so it makes sense to see if there are any lessons we can learn from his wisdom. While none of us will ever approach the”Oracle Of Omaha’s” wealth, there’s something to his humble, down home style that many of us can relate to. I love his infamous and folksy quotes, and have included one with each lesson. Also, for anyone interested in seeing his brilliant mind at work, I encourage you to carve out time to read his infamous Annual Shareholder Letters, which are regarded by many as the best business advice ever written.
Here then, from a variety of articles which I’ve read on Mr. Buffett, are a few of the lessons we should all learn from him.
1. Avoid Lifestyle Inflation
“If you buy things you do not need, soon you will have to sell things you need.”
As most people see their wealth increase, they naturally consume more. Not so with Mr. Buffett. Personally, one of the things I admire most about the man is his ability to maintain a very basic lifestyle in spite of incredible wealth ($63 Billion as of Sep 2015). He’s avoiding the trappings of materialism in spite of an income which would allow him to “enjoy” the finer things in life. I admire that. There’s no better example than his oft cited choice of a home, which is best explained by 2 photographs:
Warren Buffet’s home (the same humble abode in Omaha he’s owned since 1958!):
Contrast that to….. Michael Dell’s Home (“The Castle”, a 33,000 sq.ft home in Austin, and only one of many homes that he owns):
Lesson For You: Fight the tendency to let your lifestyle increase as your income grows. Rather than spend more, save more, and be financially independent sooner! Every time you get a pay increase, increase your savings rate before you can spend the extra money. For example, if you get a 3% raise, increase your savings by 2% in the same month the pay increase hits your bank account. Don’t “keep up with the Jones”. As I read somewhere recently, develop the mentality that anytime you see someone in a BMW, you think to yourself, “Poor sucker, she just gave away a few more years of her retirement.”
2. Buy And Hold
“Our favorite holding period is forever.”
Buffett is well known for his value investment philosophy, in which stock is purchased at a price below it’s estimated instrinsic value. His obsession is to find “great companies at a sensible price” rather than “good companies at a bargain price.” Once he buys a position, he holds it for a very, very long time rather than trying to time peaks and valleys in the pricing to adjust his holdings.
Lesson For You: Don’t try to time the market, but rather focus on a diversified portfolio of solid companies (see next lesson: use low-cost index funds) and ignore the market’s volatility if you’re still in your working years. Use “dollar cost averaging” to average your cost down over time (consistent $ purchases will result in buying fewer shares when the price is high, and more when the price is low). Bear markets are actually a good thing if you’re still in the “buying” phase through your career, as they allow you to buy shares “on sale”. Don’t panic and sell during a downturn – it WILL negatively impact your return over the long run. Maintain an appropriate asset allocation. If you’re already retired, use a bucket strategy and other tools to make your money last through retirement and avoid selling during a downturn.
3. Use Low-Cost Index Funds
“Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund,”
Buffett has been a long time proponent of low-cost index funds, saying “If you invested in a very low-cost index fund – where you don’t put the money in at one time, but average in over 10 years – you’ll do better than 90 percent of people who start investing at the same time”.
Lesson For You: Note Buffett’s preference for a simple portfolio and asset allocation utilizing only low cost, widely diversified funds. Learn from that, as well as his point about “don’t put the money in at one time” (dollar cost average). On the same vein, don’t pull money out, as many individuals get nervous during market downturns and sell index funds at the wrong time. Don’t over-complicate your investment portfolio, and make sure you have an age- and risk-appropriate exposure to equities to keep up with inflation over time. If you seek more “excitement” with your investments, do what I do and set aside ~10% into a “Fun Money” account, where you can speculate, trade and (most likely) lose money without impacting your overall portfolio.
4. Avoid Debt
“I do not like debt and do not like to invest in companies that have too much debt”
Buffett built his wealth by having interest work FOR him. Those in debt have interest working AGAINST them, especially high interest debt (think credit cards). As he once said, “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money”.
Lesson For You: Just as compounding (“the most powerful force in the universe” according to Einstein) can have an unbelievable impact on the growth of your investment portfolio over time, the same math destoys a portfolio which is held down by the anchor of debt. Destroy your debt, attack it aggressively. Buffett follows this rule, do you?
5. Keep Cash On Hand
“I have pledged… to always run Berkshire with more than ample cash… I will not trade even a night’s sleep for the chance of extra profits.”
Buffett made headlines in the ’08-’09 crisis when he was offering bailouts to the likes of GE (in the amount of $3 Billion!). By having “dry powder” in a crisis, he was able to leverage very favorable returns on his investment, and demonstrated again why he’s one of brightest financial minds in the world.
Lesson For You: While we’ll never achieve a $3 Billion “reserve” of cash, it’s critical to maintain a safety reserve of safe, liquid cash. If you’re under the age of 30, 1 month is sufficient. If you’re 30-55, you should maintain 6 months of reserves. As you enter retirement, have 2 years worth of spending held in cash to avoid the need to sell any investments in a bear market. If the market dips, draw down your reserve. If the market spikes, build it up. Consider diversifying your emergency reserves between money market funds, short term bond funds, precious metals and cash. With interest rates low, there’s minimal opportunity cost to holding some actual cash (those folks in Greece probably wished they’d have done that before their ATM withdrawals were limited to $60 per day).
6. Take Care of Your Spouse
“What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit…My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors…”
Buffett has clear instructions for the trustee of his estate. So, too, should you.
Lesson For You: Insure you have an updated will, as well as appropriate “end of life” documents prepared well in advance (“Do No Resuscitate” directives, power of attorney documents, etc.). In addition, consider a “Love Letter” for your spouse, with clear directions on all financial accounts (including web sites, passwords and usernames) and steps for him/her to follow in the event of your death. I created my first “love letter” 5 years ago, and update it every year as part of my “year-end” financial sweep. It brings peace of mind to both of us know that, if the worst were to happen, she’d know what to do.
7. Be Charitable
“If you’re in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.”
Mr. Buffett made headlines when he pledged to give away 99% of his fortune to charities, founding The Giving Pledge with Bill Gates in the process. Since that time, 130 billionaires have taken the pledge, and promised to give their fortunes away.
Lesson For You: If you’re reading these words, chances are that you’re one of the richest people in the world (really!). Be thankful, but not greedy. Recognize your obligation to give. Personally, I think we are often blessed in proportion to our generosity (or, inversely, hampered by our greed). You may be surprised at how rewarding it is to give.
There you have it; 7 lessons from one of the greatest “money” minds in the world. Read through the list again, slowly, and pick out the 1-2 areas where you’re falling short – jot them down on a piece of paper and put it in your pocket. Do a google search on the topics you’ve chosen. Make a plan, and begin implementing it on the first of next month. Put a date on your calendar now as a reminder.
Achieve A Great Retirement.