Top 5 Personal Finance Lessons From Warren Buffett

As mentioned previously, when Mrs. PoP was out of town recently, she came home to find that Mr. PoP had kept himself happily entertained for days with a couple of glasses of wine and hundreds of pages of wisdom from Warren Buffett, as he worked his way through previous years’ worth of Buffett’s annual shareholder letters.  This post is just a tidbit of what he found in that adventure.

 

What Can Uncle Warren Teach Us About Personal Finance?

Warren Buffett needs no introduction.

He’s one of the wealthiest men in the world, got that way by being maybe the best investor ever (if you can think of anybody with a better record over the past 50 years, lemme know in the comments), and is going to give away about 99% of that wealth to philanthropy upon his death.

Every year Buffett releases his shareholder letter (here is a link for the set from 1977 to present, here are the letters that he wrote to the partnership that he had previous to Berkshire); a letter written to the shareholders of Berkshire Hathaway which gives them a review of his performance for the past year.  (We wrote our own aspirational shareholder letter for 2012, too!)

I’m a big fan of Buffett, and the letters are widely seen as a trove of wisdom for investors, but I’ve recently been re-reading them and was surprised at how much of Buffet’s thoughts on investing could also be applied to the personal finance area.

 

Top 5 Personal Finance Lessons From Warren Buffett’s Letters:

1.)  Understand the difference between Price and Value – Buffet’s genius is that he is better than 99.99% of people in the world at putting a correct value on an asset. This is why he can identify assets that the market has mis-priced, be they stocks, or entire companies. Putting the correct price on assets like time and happiness is at the very core of personal finance, and we have to be just as good as Buffett in understanding the value that each of these things have in our lives.

2.)  Stay away from leverage – Occasionally Buffett borrowed money from banks  to make large purchases of assets the he believed were very underpriced. We did the same when we bought our house and duplex, but beyond that his invesetment gains have been made from cash on hand. In other words, he invested so well that his companies kept kicking off more and more cash…which gave him more money to invest.

3.)  Keep your goals consistent and in plain view – In about dozen different ways over the span of four decades Buffett states that the goal of Berkshire Hathaway is to increase the intrinsic economic value of the company on a per-shareholder basis. The guy has had a single goal for 40 damn years! I can’t walk from my desk to the coffee machine at work without changing my mind and getting a coke instead! I think if Mrs. PoP and I can maintain the same focus on our personal finances over the next few years that Buffett has during the last 40, we’ll be doing well.

4.)  Be honest with youself about your past performance and future prospects – Because Buffett’s goal has been so consistent, he is able to track his progress since 1972.  At the begining of the 2012 letter he lays out his performance for each year, and compares the average to what an investor would have made in the S&P during the same time. Also, he is up-front with his investors about what his future prospects are (hint: not as good as his past performance). If you want to do well in personal finance, the same kind of transparency has to be applied to your past spending habits, and your future earnings potential.

5.)  Be yourself – In all of his writing and investing, Buffett never tries to emulate anyone.  Instead, he is simply himself – and sometimes that self is a dirty old man!  Here is my favorite quote from the 1981 letter where Buffett is speaking in the context of the high inflation rates of the early ’80s:

“We applaud the efforts of Federal Reserve Chairman Volcker and note the currently more moderate increases in various price indices. Nevertheless, our views regarding long-term inflationary trends are as negative as ever. Like virginity, a stable price level seems capable of maintenance, but not of restoration.”

Ha!

 

Are you a Warren Buffett fan?  What has business or stock investing taught you about personal finance?

33 comments to Top 5 Personal Finance Lessons From Warren Buffett

  • I’m definitely a Warren Buffet fan. He is a big believer of not investing in things that you don’t completely understand (such as with the industry the company is in), and that is something that I am working on. Looking more into the industry and the risks and value in it are important!
    Michelle recently posted..We Quit Our Jobs With $26,000 To Travel the WorldMy Profile

    • Definitely agree – I think he’d argue that he wants to understand the industry as well as the company does to make a sound investment decision!

  • Buffet is an inspiration to value investors of all stripes. I don’t think you should necessarily stay away from leverage. But you do need to treat it with respect and have a solid plan for using it.
    My Financial Independence Journey recently posted..Recent Transactions – Lots of StuffMy Profile

    • I like the idea of treating leverage with respect. Kindof like a dangerous animal or weapon. You need to know proper handling procedures to reduce your risk when dealing with it.

  • I find point number two interesting. I figured that anyone that can pick them as well as Warren would love leverage. I mean, if you’re right more than 50% of the time, it’s going to be a quick way to gain wealth. I’m still developing my own thoughts on leverage, but it’s good to know you and he are against it for the most part…
    CashRebel recently posted..Stop Acting Rich by Thomas Stanley: A Cash Rebel ReviewMy Profile

    • We’ve used leverage pretty strategically. We basically only levered to buy real estate – our house was an 80/20 mortgage (~$111K orig balance) that we’ve never had less than 20% equity in, and then over the next two years we levered against investment properties to pick them up while the poop was hitting the fan in the local RE market. But it doesn’t make sense to keep borrowing to get more properties at current prices, so we’re paying them off as fast as we can. 1 loan down, 1 more to go.

    • Some say that Buffett’s usage of float constitutes levage…to my eyes it looks like low cost of capital to be sure, but not leverage as understood by hedge funds who may be leveraged up 40:1. There is slightly more to leverage than being “right” 51% of the time…if you lose big the other 49% of the time (and its easier to lose big when you’re using leverage!), then you’re in bad shape regardless.
      Mr PoP recently posted..Top 5 Personal Finance Lessons From Warren BuffettMy Profile

  • Aside from my 401k contributions, I’m not yet at the investing stage. I have some debt to conquer yet, and an emergency fund to, well, fund. In an effort not to overwhelm myself, I’m concentrating and learning mostly about the phase I’m in now. That being said, I do stumble across a lot of information about Buffett and his philosophies. His ideas seem solid and straight-forward, and he obviously has the successes to back them up. So right now I’m in the “sounds good, I’ll look into it further when I get there” camp. Hopefully all the stuff I’m picking up along the way will make it easier once I get there!
    Ms.W @ GrowingHerWorth recently posted..Learning to Say NoMy Profile

    • It definitely won’t hurt. We’re not into individual stock investments, but I think one of the main reasons we both like Buffett so much is that we just see a really good philosophy that we try and apply everywhere.

      The one I like the best is buy value not price. I don’t care if a shirt is 80% off MSRP. For me, I want to look at what the shirt will cost me today – and determine if I value it enough to spend that much. I think that’s my biggest takeaway on Buffett – that price and value are two different things and you really want to pay attention when the numbers don’t match up.

  • As a Nebraska native, I’m most definitely a Warren Buffet fan. I’m learning to not chase after hot tips or falling for hyped up stocks. I’ve had success investing in companies that I personally believe in whereas I’ve been burned with purchase in an oil and gas company that I know very little about.
    My Shiny Pennies recently posted..Why So Many Haters of Early Retirement?My Profile

    • Dare I ask which oil and gas company? Mr. PoP bought some BP when the Deepwater Horizon fiasco happened since he thought the price dropped below the long term value of the company, even after taking the fiasco into account.

  • Definitely a Buffett fan. In fact, this week my humble blog is also focusing on a Buffetism. We’re fortunate that the master so openly shares his wisdom, and that that wisdom is within reach of all.

    I’m wrapping up his (thick) authorized biography and what emerges from that as his #1 view on everything: the miracle of compounding. He always views $1 spending today as $100 in future benefit he foregoes. In his accounting, that $100 suit really costs $10,000 in end game wealth. That’s why he’s always been so cheap in everything he did.

    It worked for him…
    William Cowie recently posted..The Hi-Lo Paradox, Part 1: Why Do You Buy High?My Profile

  • I love Buffet because he has the ability to break down complex ideas into very simple terms. Most people can’t do that, I know I struggle with that a lot when speaking to my wife about finances. I need to still go through all of the shareholder letters that he’s written. I’m sure there’s plenty nuggets that haven’t been talked about.
    JC @ Passive-Income-Pursuit recently posted..Genuine Parts Company Dividend Stock AnalysisMy Profile

    • There are tons of nuggets, and also hundreds of pages of reading. Links to all of the letters are in the post above, but don’t try and rush through them. Enjoy each one =)

  • Great post! What I love most about Buffet is that he is financially responsible with his $$, even though he doesn’t have to be, by a long, long shot! I also have read that he’s not leaving much to his kids, moneywise, b/c he wants them to be hard-working people and not just sit around waiting for him to die off so they can squander all that he worked for and ruin their lives. Now that’s love!
    Laurie @thefrugalfarmer recently posted..The Biggest Auto Loan MistakesMy Profile

    • Definitely agree with those points. Mr PoP and I have witnessed some 2nd generation wealthy end up pretty entitled and end up dismantling a lot of what Gen 1 put together.

  • Oh wow, I dig Buffett.

    My favorite thing about him and his strategy is that its actually very simple: buy great companies with big moats and a strong history (Coke, IBM, railroads) and the rest will take care of itself. Contrast that with all of the silly market timing strategies that people come up with that don’t do as well as Buffett. He has the historical record to back it up.

    Whenever someone tries to sell me on some sill strategy, I point them back to Buffett’s historical record (page 2 of the current letter) and say, ‘If your strategy can beat his, then let’s talk.’

    I’m eagerly awaiting my passes to Buffettpalooza in May. Can’t wait to hear what him and Charlie have to say.
    Mr. 1500 recently posted..Thursday Rant: It’s a sad, sad, sad, sad WorldMy Profile

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  • Such a wise man, ironic that so many of the ways he became successful and made his money were just, “common sense”. Don’t borrow money recklessly, don’t buy things you can’t afford, don’t invest your money in companies or strategies you don’t understand. Much to be learned from him.
    KK @ Student Debt Survivor recently posted..Survivor’s Standouts-Easter EditionMy Profile

  • I actually haven`t heard that much about him, but we do have a similar type of famous man in Norway, who is filthy rich and he´s going to give away his entire fortune to charity when he dies, so he reminds me a lot of Buffett.
    I love how it`s the simple way and reasonable actions that works best!
    The Norwegian Girl recently posted..Where are you Spring? & Sunday LinkMy Profile

  • LOLoriffic

    @ Laurie the frugal farmer….

    Adding the $600 MILLION that Buffett gave each of his kids he has given each of his children $2.1 Billion

    Not leaving much to his kids? That’s a laugh.

    Munger, on the other hand gave each of his 8 kids only $50,000,000 (What a cheapskate!!!)

  • Awesome, I always appreciate a good Buffet reference. Singular goals and focus go a long way, especially over 40 years! I’ve been focused for almost 2 years and feel completely turned around financially (in a good way). I can imagine a lot of long-term benefits from maintaining this focus for another 5-10 years!
    American Debt Project recently posted..Here’s Why You Should Never Trust What You Read in the NewsMy Profile

  • My favorite things about Buffett –
    1. He’s consistent in his philosophy and execution of it
    2. He goes out of his way to use plain language to explain his philosophy. So many financial professionals hide their ignorance behind complicated vocabulary.
    3. Like any good prophet, his way is radically different from the mainstream approach. To follow the Buffett way is simple, but not at all easy. Its radically difficult.
    4. His success undermines one of my basic beliefs – market efficiency – by consistently outperforming the market.

    • Mr. PoP would no doubt agree that those are many of his favorite things about Buffett, too. Especially the plain language. He always pulls out nuggets of simple truths out of Buffett’s letters and then reads them aloud to me.

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