Everyone has annual events that get them excited. Football lovers eagerly anticipate the Super Bowl, baseball fans anxiously await the World Series and many investors look forward to when Warren Buffett and Berkshire Hathaway release their annual letter to shareholders. This year there has been a double dose of advice from Warren Buffett because HBO recently released the documentary “Becoming Warren Buffett”. There is no denying that Buffett’s journey to building over $70 billion in wealth is extraordinary, and it gives weight to his ability to focus on numbers and spot opportunities. Part of what makes Buffett so special is his tendency to provide folksy life advice built into his interviews and writings. Here are some of the nuggets of knowledge in these two recent Buffett releases:
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Make the most of your body and mind. The HBO documentary opens with Buffett speaking to a classroom of students. He starts his analogy by asking the hypothetical question, “What car would you like to have if I offered you any car?” The catch: It is the only car you are going to get in your lifetime. Since it is your only car, you are going to have to take care of it. He shares that we should think about our body and minds the same as this vehicle. We only get one mind and body, and they may feel terrific now, but it must last you a lifetime. Make sure you are thinking long-term with the decisions that affect your body and mind.
Be willing to take the extra step that others won’t. Buffett attributes much of his value investing success to being mentored by Benjamin Graham. Graham is considered the “father of value investing” and co-wrote the successful investing books “Security Analysis” with David Dodd and “The Intelligent Investor”. What you may not know is how Buffett got into Columbia University to study under such influential individuals. Buffett had just been rejected by Harvard University and noticed that Columbia had Graham and Dodd as professors. Buffett wrote David Dodd a personal letter letting him know he enjoyed reading “Security Analysis” and would like to learn from them. That letter is what led to Buffett being admitted to Columbia University. That one act of going beyond the basics by writing the letter and asking for the opportunity led to the shaping and development of the best investor of our lifetime.
Read “How to Win Friends and Influence People” by Dale Carnegie. From watching the documentary, it is apparent that Buffett struggles with navigating normal social cues because of his analytical nature. As he put it, after college he had developed pretty good business skills, but he had not come to terms with the world. He has overcome this and gives full credit to his time in the Dale Carnegie Course. In fact, his diploma from the Dale Carnegie Course is the only diploma on display in his office. The book that started it all can be read by anyone looking to be a better friend, spouse or business person. This book will help you master human nature.
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Being a contrarian can be profitable. Buffett shared in this year’s letter to shareholders, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.” In other words, look for opportunities when things are scary and then take advantage of them.
It pays to be optimistic about the future. Buffett also shared this nugget in his annual letter: “Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it. This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.” Take advantage of the opportunities this country has to offer.
Control your fear and emotions. Try to keep your emotions out of investing. Instead, aim to look at each situation logically. “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases,” Buffett says in his letter. “Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.”
Don’t underestimate the power of simple investing with index funds. Buffett wagered $500,000 in 2007 that no investment pro could select a set of at least five hedge funds that would, over ten years, match the performance of an unmanaged S&P 500 index fund. As we approach the conclusion of the 10-year bet, the results are astonishing. The managed hedge funds have delivered through 2016 an average of 2.2 percent annually. The compounded annual increase for the S&P 500 was 7.1 percent. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” Buffett says. “Both large and small investors should stick with low-cost index funds.”
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The HBO documentary and the Berkshire Hathaway letter to shareholders allowed us the opportunity to better understand how Buffett makes investment decisions. His insight is educational and actionable. Buffett shows how powerful the concept of compounding interest can be. It took Buffett 56 years to become a billionaire, and that number has since compounded and multiplied many times over. Use these tips to start building your nest egg today. And remember this quote from Buffett, “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, “The Money-Guy Show“.
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7 Life Lessons From Warren Buffet originally appeared on usnews.com
