Warren Buffet was on the cover of Parade magazine last week. Parade magazine, you ask? We are trying a coupon experiment and are getting the Sunday paper delivered for two months to see if we can save any money through coupons. Apparently, Parade magazine comes in our Sunday paper…but I digress.
There is a brief article in Parade listing "Warren Buffets secrets that can work for you." Since he currently has a slightly higher net worth than I do, I thought it would make sense to share his "secrets." This is good advice, but I think it says a lot about the state of personal money management in the USA today that some of these are considered "secrets." (and, of course, I mean that in a bad way)
- Reinvest your profits – When you first start making some money, don’t spend it all right away. Rather, use it to grow your business and increase your profits.
- Be willing to be different – This one confused me somewhat. The article claims that instead of following the herd, Buffet focused on undervalued investments and beat the market year after year which makes a lot of sense. It then states, "To Buffet, the average is just that – what everybody else is doing." This confuses me a bit because Buffet is a big proponent of low-cost index fund investing. So much so that he bet approximately $320,000 that the S&P 500 Index Fund will outperform a collection of sophisticated hedge funds . The argument against index funds is that they are "just average." Anyway, the point is, don’t just do what everyone else is already doing in the same way that everyone else is already doing it.
- Never suck your thumb – Gather your information and make a decision. Calling any extra time wasted before making a decision "thumb sucking," the article states that when people offer Buffet a business or investment, he makes a decision on the spot. (I need to work on this thumb sucking thing with my daughter, actually…"see honey, Warren Buffet says you shouldn’t suck your thumb either and he’s the Oracle of Omaha…")
- Spell out the deal before you start – Always agree on the specifics of any deal before starting on it. Buffet notes that your bargaining position is greatest before beginning work on a job. So, even with friends and relatives, make sure everyone understands and agrees to the details of the deal in advance.
- Watch small expenses – I think this is what spurs him to recommend low cost index funds. If you read that article above, you’ll see the crazy fees that are levied by those hedge funds. This suggestion, of course, extends far beyond just investing advice. Limiting your expenses in all areas of your life will extend the reach of your paycheck as well.
- Limit what you borrow – Woohoo, now you’re talking! The article claims that Buffet has never borrowed a significant amount of money. His advice is to become debt-free and then save some money to start investing. This is quite a bit different from all the gurus claiming that rich people get rich by using other people’s money.
- Be persistent – Buffet claims that someone possessing persistence (and ingenuity) can win against a bigger and/or more established competitor.
- Know when to quit – Sometimes, it is best to just cut your losses and walk away instead of throwing good money after bad. When you are down, resist the inclination to win it all back with the next bet.
- Assess the risks – The article describes a situation where Buffet advised his son to imagine the worst-case and best-case scenarios for a certain course of action. This exercise will help you understand the risks and rewards for whatever decision you are making.
- Know what success really means – The article claims that Buffet does not measure his success by dollars. Here’s an interesting quote from Buffet:
"I know people who have a lot of money," he says, "and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age, you’ll measure your success in life by how many of the people you want to have love you actually do love you. That’s the ultimate test of how you’ve lived your life."
There you have it, wisdom from the "Oracle of Omaha." For the most part, I really like what Buffet has to say about personal finances. He certainly doesn’t strike me as a Donald Trump type – rich one year, broke the next, rich the next (that makes me wonder how much money Trump actually "owns" and how much his fortune is just a product of "creative accounting"). Anyway, I’m going to try Buffet’s "secrets" and see how close I get to increasing my net worth to $62 Billion.
