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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
What if you could learn financial literacy from Warren Buffett himself?
Finance is a language like any other: the more fluently you speak it, the further—and more comfortably—you travel. And if you want to improve your financial literacy, what better teacher could you have than Warren Buffett? Often described as the greatest investor of all time, Warren Buffett started his investment firm with$100 in the late 1950s and went on to become the billionaire and sage we know today. Along the way he's reaped huge profits for fellow investors in Berkshire Hathaway and remains one of the most sought-after and closely watched figures in the business world.
So how did he do it? In Buffett's Tips, award-winning professor and professional investor John M. Longo demonstrates just how by translating decades of Buffett's writings and media appearances into a 100 straightforward tips and strategies anyone can follow for enhanced financial literacy and independence, including:
- Essential concepts like the time value of money and compound interest
- Basic financial instruments, such as savings and checking accounts and certificates of deposit
- Approaches to valuing stock, including discounted cash flow and relative valuation
- How to build a portfolio in accordance with Buffett's two golden rules
Whether you want to grow your personal finances, develop your business acumen, or improve softer career skills such as emotional intelligence, there's no one better to learn from than the most famous investor in the world—and no better way to do that than having a copy of Buffett's Tips close at hand.
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Table of Contents
Cover
Title Page
Copyright
Dedication
Preface
Reference
Acknowledgments
1
Who Is Warren Buffett?
Introduction
Buffett the Teen
Who Are We to Write This Book?
What Is Financial Literacy and Why Does It Matter?
Some Fundamental Buffett “Tips”
Buffett's Work Ethic
Buffett Has Spent a Lifetime Learning
Why Is Buffett Happy?
Improve Your Communication Skills and See Your Lifetime Earnings Increase 50%
Acting with Integrity Is the Right Thing to Do and Good for Business
Buy Low, Sell High
Buffett Doesn't Succumb to Peer Pressure: The Inner Scorecard
Buffett's Fallback Career—Comedian
Buffett's Lasting Legacy: Philanthropy
References
2
Investment Fundamentals According to Buffett
Introduction
The “Miracle of Compound Interest” Explained
Trade-Offs: A Fundamental Principle of Life
The Saint Petersburg Paradox: A Lesson on Risk and Return
Risk and Return: The Evidence
Diversification: One of the Few Free Lunches in Life
Supply and Demand Determine Price
Summary on Financial Fundamentals
References
3
Bank Accounts, Debit Cards, Credit Cards, and Your Credit Score
Introduction
Insured Bank Deposits
Savings Accounts and Certificates of Deposit (CD)
Checking Accounts and Electronic Bill Payment
Parts of a Check
Balancing a Checkbook
Debit Cards and Automated Teller Machines (ATM)
Credit Cards and Charge Cards
Apps to Send Money: PayPal, Venmo, Zelle, Apple Pay, Android Pay, and so forth
Your Credit Score: A Report Card of Your Financial Responsibility
Personal Bankruptcy: Try to Avoid at all Costs
A Word on Bitcoin from Buffett
References
4
Bonds and Inflation
Introduction
US Savings Bonds
Other US Treasury Fixed Income Securities
Inflation and the Consumer Price Index (CPI)
Bond Ratings and Corporate Bankruptcy
Corporate Bonds, Municipal Bonds, and Bowie Bonds
Bowie Bonds and Other Asset-Backed Securities
The Federal Reserve: The Central Bank of the United States
What Determines Interest Rates?
Intuition on Estimating the Price of a Bond
So Are Bonds Good Investments?
A Note on Negative Bond Yields
Appendix
References
5
Stock Market Fundamentals
Introduction
Initial Public Offerings (IPOs): The Birth of a Stock
Investment Banks and Investment Bankers
The Main Event: The Stock Begins Trading on the Exchange
The Stock Exchange
A Sidebar on Stock and Mutual Fund Symbols
Dividends
Large Cap vs. Small Cap
Growth vs. Value
Domestic vs. International
An Index Fund: A Great “Set It and Forget It” Long-Run Investment
Beating the Market and the Efficient Market Hypothesis
Meet Mr. Market, the Manic-Depressive Stock Market
Appendix
References
6
Buffett's Approach to Stocks
Introduction
Estimating the Value of a Stock
Getting a Price Target with the Discounted Cash Flow Model
Getting a Price Target with the Wall Street P/E Model
Buffett's Approach to Stocks
Getting into the Buffett Mindset on Investing
Stay within Your Circle of Competence
The Importance of Being Patient
Good vs. Bad Companies and the Passage of Time
How Buffett Thinks About Change in an Industry
Types of Businesses Buffett Likes
Demonstrated Consistent Earnings Power
Look for Companies with Good Management
Buy Companies That Have the Power to Overcome Inflation
Focus on Firms with Favorable Long-Term Prospects
When to Sell
Summarizing Buffett's Approach
References
7
Accounting Fundamentals: The Report Card for Businesses
Introduction
The Income Statement: A Company's Report Card for One Period
Apple's Income Statement
The Balance Sheet: A Picture of a Company's Report Card Since Inception
Current Assets
Long-Term Assets
Liabilities
Current Liabilities
Long-Term Liabilities
Stockholders' Equity
A Quick Note on the Statement of Cash Flows
Summary
References
8
Buffett's Approach to Portfolio and Risk Management
Introduction
The Key to Selecting a Well-Diversified Portfolio: Correlation
A (Theoretical) Portfolio with No Risk
Selecting an Optimal Diversified Portfolio: The “Business School” Approach
Buffett's First Approach to Portfolio Selection: Index Funds
Buffett's Second Approach to Portfolio Selection: Expert Mode
A Compromise Solution to Portfolio Selection
How Many Stocks Make a Diversified Portfolio?
The “Business School” Approach to Risk
Buffett's Critique of the Business School Approach to Risk
Buffett's Approach to Risk
Buffett on Gold
Summarizing Buffett's Views on Risk
Endnote on CAPM
References
9
Business 101: Companies You Should Know
Introduction
The Dow Jones Industrial Average: The Oldest Diversified US Stock Market Index
How the Dow Is Calculated
An Explanation of Stock Splits
Different Share Classes and Buffett on Stock Splits
Current Stocks in the Dow Jones Industrial Average
Materials Stocks in the Dow
Chevron (NYSE: CVX)
Dow Chemical (NYSE: DOW)
Consumer and Business Services Stocks in the Dow
Home Depot (NYSE: HD)
McDonald's (NYSE: MCD)
Walmart (NYSE: WMT)
Consumer Goods Stocks in the Dow
Apple (NASDAQ: AAPL)
Coca-Cola (NYSE: KO)
Nike (NYSE: NKE)
Procter & Gamble (NYSE: PG)
Walgreens Boots Alliance (NASDAQ: WBA)
Walt Disney (NYSE: DIS)
Financial Stocks in the Dow
American Express (NYSE: AXP)
Goldman Sachs (NYSE: GS)
JPMorgan Chase & Co. (NYSE: JPM)
Travelers (NYSE: TRV)
Visa (NYSE: V)
Health Care Stocks in the Dow
Amgen (NASDAQ: AMGN)
Johnson & Johnson (NYSE: JNJ)
Merck & Co. (NYSE: MRK)
UnitedHealth Group (NYSE: UNH)
Industrial Goods Stocks in the Dow
Boeing (NYSE: BA)
Caterpillar (NYSE: CAT)
Honeywell (NYSE: HON)
3M Company (NYSE: MMM)
Technology Stocks in the Dow
Intel (NASDAQ: INTC)
International Business Machines (NYSE: IBM)
Microsoft (NASDAQ: MSFT)
salesforce.com (NASDAQ: CRM)
Telecommunications Services Stocks in the Dow
Cisco Systems (NASDAQ: CSCO)
Verizon (NYSE: VZ)
Some Blue-Chip US Stocks That Aren't in the Dow
The FANG Stocks—They Don't Bite
China's Emerging Titans
Some International Energy Titans
Some Global Consumer Titans
Some Global Financial Service Firms
References
10
Business 101—Past and Present Business Leaders, or Who's Who in Business
Introduction
Past Business Leaders
Rose Blumkin (Mrs. B)
Andrew Carnegie
Walt Disney
Thomas Edison and Jack Welch
Henry Ford
Katharine Graham
William Randolph Hearst
Steve Jobs
Ingvar Kamprad
Ray Kroc
Estee Lauder
J.P. Morgan
John D. Rockefeller
Cornelius Vanderbilt
Sam Walton
Thomas Watson Jr.
Present Business Leaders
Bernard Arnault
Mary Barra
Jeff Bezos
Richard Branson
Michael Bloomberg
Sergey Brin, Larry Page, and Sundar Pichai
Shawn Carter, Beyoncé Knowles, Sean Combs, and Andre Young
Tim Cook
Jamie Dimon
Jack Dorsey
Bill Gates, Paul Allen, and Steve Ballmer
Reed Hastings
Kylie Jenner and Robyn Fenty
Phil Knight
Jack Ma, Pony Ma, and Robin Li
Rupert Murdoch
Elon Musk
Amancio Ortega
Howard Schultz
Oprah Winfrey
Mark Zuckerberg and Sheryl Sandberg
References
11
Being Thrifty like Buffett: Ways to Save Money
Introduction
Your Library: Free Books, Magazines, Newspapers, Music, Movies, and More
Free Educational Courses: Khan Academy, Coursera
Websites for Free Stuff
Free Activities
Amazon.com: The World's Biggest Store
Comparison Shopper Tools: Your New Best Friend
Barter: Turning a Cell Phone into a Porsche Convertible
Eat a Low-Cost Meal, Periodically
Shop Private Label and Generic Items
Clothes: Outlet Stores, Vintage Items, and Buying Off-Season
Buying Gasoline
Coupons, Double-Couponing, Triple-Couponing, and Groupon
Rewards Programs
Negotiate with Cell Phone, Cable, and other Service Providers
Yard Sales, Flea Markets, and More: Turning Trash into Treasure
Do-It-Yourself
Donate Things to Charity
Avoid Shooting Yourself in the Foot with Bad Habits
Tying It All Together in a Budget
Appendix: Sample Budget
References
12
Buffett's Views on Cars and Homes
Introduction
Do You Need a Car?
New Cars vs. Used Cars
Buying vs. Leasing a Car
The Best Time to Buy or Lease a Car
Home Basics
Finding A Home
Bidding for a Home
Paying for a Home: The Down Payment
Paying for a Home: The Mortgage
A “House Hack”: Getting Someone to Pay (Most of) Your Mortgage
Looking Under the Hood of a Mortgage
What Determines Home Prices?
References
13
Buffett on Dale Carnegie, Communication Skills, and Emotional Intelligence
Buffett Learns Life-Changing Skills in a Dale Carnegie Course
CliffsNotes Version on Dale Carnegie and How to Win Friends and Influence People
Things How to Win Friends and Influence People Will Do for You
Techniques in Handling People According to
How to Win Friends and Influence People
Six Ways to Make People Like You According to
How to Win Friends and Influence People
How to Win People to Your Way of Thinking, According to
How to Win Friends and Influence People
What Is Emotional Intelligence (EQ)?
Emotional Intelligence (EQ): Some Details
Have A Great Posse
References
14
Buffett's Tips for College
Introduction
College: The Basics
Getting into a College
Graduate School: Optional for Some Jobs, Mandatory for Others
Paying for College: Scholarships and Grants
Paying for College: The Three-Year Plan for Super Achievers
Paying for College: 529 Plans
Paying for College: Student Loans
Paying for College: On- and Off-Campus Jobs
Your Resume: A Snapshot of Your Qualifications for a Job
Putting Together Your Resume
The Objective Section
The Education Section
The Work Experience Section
The Skills Section
The Activities and Interests Section
Cover Letter
Appendix
References
15
Buffett's Tips for Careers
Introduction
LinkedIn Profile: Your Online Resume
Finding an Internship or Job
The Job Interview(s): Preparation
The Job Interview(s): Acing Your Interview
The Job Interview(s): Compensation, or Show Me the Money!
Succeeding on the Job
Financial Paperwork After Getting a Job
Forms W-2 and W-4
Form 1040: The Annual Income Tax Form and “The Buffett Rule”
Retirement Plans
Becoming a 401(k) or IRA Millionaire
Appendix
References
16
Buffett's Tips for Philanthropy
Buffett's Huge Gift and the Giving Pledge
Getting Involved in Philanthropic and Charitable Activities
Measuring Performance
Market-Based Economies Are Good … Unless You Wind Up as Roadkill
It's Not All About the Benjamins
The Loss of Reputation Hurts More Than the Loss of Money
Inheritance Matters
Buffett's Definition of Success
Appendix
References
Glossary of Financial Terms in “Plain English”
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1 Unemployment rates and earnings by educational attainment, 2019
Chapter 2
Table 2.1 Risk and Return in the US: 1926–2019
Chapter 3
Table 3.1
List of Illustrations
Chapter 2
Figure 2.1 $10,000 Invested With Buffett or in a Small Cap Value Index Fund ...
Figure 2.2 Supply-Demand Diagram
Chapter 3
Figure 3.1 A Sample Check
Figure 3.2 Components of a Credit Score
Chapter 4
Figure 4.1 The U.S. Treasury Yield Curve, April 2020
Figure 4.2 Consumer Price Index Components
Chapter 5
Figure 5.1 Edison Stock Ticker Machine
Figure 5.2 The Style Box
Chapter 7
Figure 7.1
Figure 7.2
Chapter 8
Figure 8.1 Selecting an Optimal Portfolio from the Efficient Frontier
Figure 8.2 Graph of the “Business School” Approach to Risk
Figure 8.3 Graph of the Capital Asset Pricing Model
Chapter 11
Figure 11.1 Google Shopping Fitbit Charge 3 Results
Chapter 12
Figure 12.1 Amortization Schedule for a Typical Mortgage
Guide
Cover
Table of Contents
Begin Reading
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BUFFETT'S TIPS
A GUIDE TO FINANCIAL LITERACY AND LIFE
JOHN M. LONGO
AND
TYLER J. LONGO
Copyright © 2021 by John M. Longo and Tyler J. Longo. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750–8400, fax (978) 646–8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging-in-Publication Data
Names: Longo, John M., author. | Longo, Tyler J., author. | John Wiley & Sons, Inc., publisher.
Title: Buffett’s tips : a guide to financial literacy and life / by John M. Longo, Tyler Longo.
Description: Hoboken, New Jersey : Wiley, [2021] | Includes bibliographical references and index.
Identifiers: LCCN 2020041943 (print) | LCCN 2020041944 (ebook) | ISBN 9781119763918 (cloth) | ISBN 9781119763727 (adobe pdf) | ISBN 9781119763710 (epub)
Subjects: LCSH: Buffett, Warren—Anecdotes. | Financial literacy. | Investments.
Classification: LCC HG179 .L5729 2021 (print) | LCC HG179 (ebook) | DDC 332.67/8—dc23
LC record available at https://lccn.loc.gov/2020041943
LC ebook record available at https://lccn.loc.gov/2020041944
Cover image: Eyeglasses: © bubaone/Getty Images Hair: Wiley
Cover design: Wiley
To my wife Kim and son/co-author, Tyler, the two most important people in my life.
—J.L.
To my grandfather for providing me with the seed capital to make my first million.
—T.L.
Preface
Many surveys have found that a large percentage of households would struggle to come up with $400 in the event of an emergency. The COVID-19 pandemic has turned this conceptual question into a very real one with potentially devastating human consequences. Financial literacy, and ultimately, financial independence are goals that everyone should aspire to. Beyond the knowledge gained, we believe that those who take the lessons of this book to heart will experience a sense of confidence and freedom in financial matters. The confidence to make good financial decisions. Freedom from the stress that comes from living paycheck to paycheck. Ultimately, the freedom to live the life you want to live and to help the people and causes that you care deeply about.
What better way to become financially literate than to use a framework inspired by perhaps the greatest financial mind that ever existed—Warren Buffett's? That's the concept and desired outcome of this book. No one reading this book will become as rich as Warren Buffett, but we do aim to teach you to become financially literate, with the backbone of the book being 100 “tips” or strategies that are largely quotes and anecdotes from Warren Buffett. We're two of his biggest fans and Berkshire Hathaway shareholders.
For decades Buffett met with groups of college students several Fridays each year for a two-plus hour Q&A session, followed by a lunch at a local Omaha restaurant. Gorat's Steakhouse and Piccolo Pete's Restaurant (now closed) were two of Buffett's favorite places to take the students. The students also received a management-guided tour of several of Berkshire's subsidiaries, such as Nebraska Furniture Mart, Borsheims, and the Oriental Trading Company. John, a Finance Professor and money manager, led four trips with Rutgers students to meet with Buffett at Berkshire's headquarters in Omaha, Nebraska. In case you're curious, Buffett did pay for the students’ lunch, and a root beer float, Buffett's favorite, was often a dessert. He often also generously posed for selfies and group photos and autographed books. It seemed like Buffett had as good a time on these visits as the students and faculty in attendance.
One thing that struck John about these meetings was Buffett's wisdom on non-financial-related topics, such as the importance of communication skills, having a group of friends that would inspire you, and the significance of helping others. So, although this book is primarily focused on financially related topics, the “life” part of the book contains many equally valuable lessons.
A confluence of events resulted in the creation of this book. Professors are required to do research, so John is always thinking about some type of research activity. He has also taught investment-related courses for roughly 20 years, with an emphasis on value investing, which is Buffett's specialty. Over the past few years, John was teaching his teenage son, Tyler, about financial-related topics in real time. For example, they opened several financial accounts specifically geared towards minors, such as a savings account, checking account, debit card, credit card, college savings plan, and brokerage account. Additionally, Tyler had completed enough coursework in financial-related topics that he was able to make meaningful contributions to this book. Specifically, he has completed coursework in Financial Literacy, AP Economics, AP Statistics, and the Introduction to Business, Finance, and Economics program for high school students at Columbia University. There are a lot of books on Buffett and even more on the topic of financial literacy. But we believe this is the only book that effectively combines the two topics.
Part of Buffett's charm is his plain-spoken language, pop culture references, and wonderful sense of humor. You will see many examples of these characteristics in our book. We tried to incorporate those elements into our writing as well. To illustrate this point, here's one example from Chapter 6. “You might find it amazing that Berkshire Hathaway has almost 400,000 employees, but there are only 25 people in Berkshire's corporate headquarters in Omaha. How can he manage so many people with a staff slimmer than Snoop Dogg's waistline?” We want this book to be understandable to all readers, so the emphasis of any conceptual topic is on intuition. Any (non-trivial) formulas are relegated to an endnote or appendix.
Financial literacy is a vast topic, so we considered a number of approaches to deciding on the content for this book. There are some basic building blocks for being financially literate, such as having the right mindset, living within your means, starting early, paying off credit cards, and investing in stocks for the long term. All of these topics receive detailed coverage, peppered with Buffett quotes to drive these points home.
Chapter 1 begins by talking about the incredible life of Warren Buffett. Many people unfamiliar with his story will be surprised at the financial success Buffett experienced at a very young age. We then move on in Chapter 2 to discussing some of the fundamentals of investing, such as the “miracle” of compound interest and how supply and demand interact to determine price. Chapter 3 takes some baby steps into financial products offered by banks and other firms. Things such as a bank account, checking account, and credit cards. It also covers newer apps, such as Venmo and Zelle, as well as your credit score.
Chapters 4 through 6 cover the bond market and stock market, the two most important financial markets for most people. Stocks are clearly at the heart of how Buffett generated his enormous wealth, so they are given detailed coverage. We discuss what a stock is, how it trades, and how it is valued by investors, as well as the features Buffett looks at when he buys part of a company, or a firm in its entirety. Chapter 7 discusses the fundamentals of accounting, which is the language of business. We'll try to make it painless by looking the essence of the financial statements of Apple and drum roll…Berkshire Hathaway.
Very few people put all their assets in a single investment. Therefore, it is crucial to discuss risk and how to create a portfolio of investments. We'll discuss two main approaches espoused by Buffett in Chapter 8. First is an index fund, an investment product that aims to own a broad cross section of investments. The second, which we refer to “expert mode,” is concentrating your assets in less than 10 firms that you thoroughly understand, or what Buffett refers to as in “your circle of competence.”
Part of being financially literate is knowing what is going on in the world of business. So Chapters 9 and 10 discuss the “who's who” of industry, both with respect to people and firms. Regardless of how much money you make, you won't build any wealth if you can't live within your means. We've all read articles about famous celebrities or athletes who were once multimillionaires but eventually went bust. Therefore, Chapter 10 is focused on being thrifty like Buffett. It basically covers ways to save money. Saving money in some respects is more important that making money, since you pay taxes on the latter approach and not the former. The two biggest purchases for most individuals are their homes or cars. Given the importance of these big-ticket purchases, we decided to devote a whole chapter to it, Chapter 12.
Buffett said taking a Dale Carnegie course in communications and dealing with people literally changed his life for the better. Chapter 13 discusses some of the key concepts espoused by Carnegie, as well as a newer topic developed by author Dan Goleman, emotional intelligence. Another big-ticket item for young people, or their parents, is college. It is more of an investment than a purchase; hence, we give the topic its own chapter. Chapter 14 discusses the ins and outs of college, especially with respect to financing it. Buffett has had an enormously successful business career, even separate from his legendary investment prowess. Chapter 15 focuses on career-related issues, such as maxing out your retirement plans and filling out the inevitable paperwork that comes with most jobs. We end the book with Buffett's tips for philanthropy. In case you don't know, Buffett is giving virtually all of his wealth away, proving that he did it for the love of the game, rather than trying to build the biggest pile of money.
We hope you read this book more than once. Even so, it's easy to forget some of the terms or concepts. To aid your life-long learning process, we've included a detailed glossary and summarize each chapter with a handy list of Buffett's tips. If you find this book helpful, don't thank us. Rather, thank Buffett by paying it forward and doing something kind for a person in need. We know he would approve!
Reference
Nova, Annie. “Many Americans Who Can't Afford a $400 Emergency Blame Debt.”
CNBC, July
21, 2019.
https://www.cnbc.com/2019/07/20/heres-why-so-many-americans-cant-handle-a-400-unexpected-expense.html
.
Acknowledgments
We would like to thank Joseph Gasparro, Joshua Pearl, and Joshua Rosenbaum for introducing us to the Wiley family and for impressing upon us the need to create a full business plan for the book. Publishing any book today is truly a multimedia endeavor, and Joe, Josh, and Josh helped us see the light on this issue. We also greatly appreciate the work of Bill Falloon, executive editor of finance and investment at Wiley, especially for championing our book within his firm. We thank Purvi Patel of Wiley and her fine staff for their invaluable comments and for shepherding this book from first draft to final production in an impressively quick fashion, without sacrificing quality. We also thank S. Indirakumari of Wiley and Lori Martinsek at Adept Content Solutions for their editorial assistance.
Of course, we were greatly inspired by Warren Buffett. We view him as the greatest investor ever and perhaps an even better person. Although he didn't contribute directly to the writing of this book, his “fingerprints” are all over it through his numerous writings, speeches, media appearances, and homespun wisdom. Buffett is a role model for young and old alike.
We thank Dr. Kimberly Morel, the other central part of our family, for her love, encouragement, enthusiasm, and understanding. Completing a work of this magnitude took a lot of time away from our family activities that would certainly have been more enjoyable. But Kim steadfastly saw the short-term and long-term benefits of this book.
We thank the faculty and student communities of Rutgers University and Global EMBA-Asia (Columbia University, London Business School, and The University of Hong Kong) for encouragement and conversations that ultimately improved this book and its ancillary materials. In particular, we thank Columbia alums Calvin Shueh and JoJo Zou, for helping to promote the book in Asia. We also thank Beacon Trust and Provident Bank for their support of financial literacy and related issues, a cause obviously near and dear to our hearts.
1Who Is Warren Buffett?
“I tap dance to work, and when I get there I think I'm supposed to lie on my back and paint the ceiling. It's tremendous fun.”
—Warren Buffett, Tap Dancing to Work: Warren Buffett on Practically Everything, 1966–2012
Introduction
Everyone wants to be financially literate and, ultimately, financially independent. What better way to become financially literate than to use the mindset of Warren Buffett, likely the greatest and richest investor who ever lived? That's the premise of this book. Through his decades of writings, interviews, and speeches, Buffett has provided reams of advice, but he has never written a book on financial literacy. This book takes much of that material and rearranges it in a way to make you financially literate and puts you on the path to becoming financially independent. It may be the next best thing to having Buffett on speed dial!
Buffett's net worth—the amount of money he would have after paying off any debts—was recently pegged at about $80 billion. But minting money just scratches the surface of Buffett's accomplishments. He'll also go down in history as one of the greatest philanthropists ever. He's giving away virtually all of his money to charitable organizations. If that's not enough, he and Bill Gates—the co-founder of Microsoft—set up the Giving Pledge, an organization where many of the world's billionaires have pledged to give at least half of their wealth to philanthropy. Buffett's also a great guy, a genuine down-to-earth person who enjoys life on his own terms. He also has an amazing sense of humor.
Here's a sample. When asked why he has a diet filled with junk food, Buffett replied, “I checked the actuarial tables, and the lowest death rate is among six-year-olds. So I decided to eat like a six-year-old.” In short, Buffett's a great role model for all people, regardless of age—if you can get past his diet.
In this book, we take some of the experiences, quotes, wit, and wisdom of Warren Buffett and apply them not only to issues related to financial literacy, but also to lessons on having a successful life. It's a boot camp on personal finance and life, with the backbone of the book constructed by the lessons of Warren Buffett from his many writings, interviews, and external biographies. Although the topic of financial literacy may be of greatest benefit to teens and young adults, since they are often starting with a clean slate, the concepts are really applicable to people of all ages, especially those without a financial background. You're probably thinking, “What can I learn from a 90-year-old?” A lot! At least in our view. And we promise to make it painless for you and, hopefully, fun!
Buffett the Teen
Buffett wasn't born rich, and he didn't turn into a financial superstar when he was an older adult. The foundation to his success was laid during his pre-teen years. When Buffett was in elementary school, in Omaha, Nebraska, he sold Wrigley's chewing gum and bottles of Coca-Cola—both future investments for him—to make money. He bought his first stock at the age of 11! We'll devote two whole chapters in this book to the stock market, but for now you can think of stock as something that makes you part owner of a business. He filed his first tax return at the age of 13, deducting the costs of his watch and bicycle as business expenses, resulting in a net payment to the U.S. Treasury of $7. Paying taxes is about as exciting as watching paint dry, but they're something you won't be able to avoid down the road, especially if, make that when, you get richer. One of America's Founding Fathers, Benjamin Franklin, once wrote, “In this world nothing can be said to be certain, except death and taxes.”
Buffett's father, Howard, was a United States Congressman for 6 years, and Warren moved with his family to Washington, DC, during the 1940s. Buffett got a newspaper route in DC delivering The Washington Post (another future stock investment). By the age of 15 he had used the profits from his business ventures to buy 40 acres of farmland in Nebraska. As a teenager, he and a friend also bought pinball machines and put them in barbershops, splitting the profits with the shop owners. Thus, we hope you can see that the experiences of the young Warren Buffett played an important role, making him the man that he is today.
Who Are We to Write This Book?
Well, first we think there's a gap in the teachings of Warren Buffett. He participated in a cartoon series, Secret Millionaires Club, over the 2011–2013 period that provided some simple tips on financial literacy, but not enough to make someone financially competent. Buffett also writes a detailed letter to the stockholders of his firm, Berkshire Hathaway, each year. Stockholders own stock and, therefore, are part owners of a business. You can find Buffett's Berkshire letters going back to 1977 on the web at http://www.berkshirehathaway.com/letters/letters.html.
You may not have heard of Berkshire Hathaway, but you've almost certainly come across some of its businesses. It owns Dairy Queen, GEICO Insurance (the car insurance company with the funny commercials), Duracell batteries, See's Candy, and dozens of other businesses. It's also one of the biggest stockholders in several of the companies that you likely know, such as Coca Cola, Kraft Heinz (maker of ketchup and mac & cheese), American Express, Wells Fargo, Bank of America, Amazon.com, Apple, and many others.
We're guessing you may not want to read a bunch of annual reports and letters to shareholders, even ones as insightful and often humorous as Berkshire's. But we've read them and extracted many nuggets of information that apply to financial literacy and life. There’ve been several excellent books written about Buffett, such as Alice Schroeder's The Snowball: Warren Buffett and the Business of Life. It's the only book on Buffett that had his explicit cooperation, but at 832 pages, it's almost the size of War and Peace! Plus, these and other excellent Buffett-oriented books and websites assume you know a fair amount about business and finance. This book doesn't take that knowledge for granted and teaches you financial literacy concepts along the way. So one way to think of this book is that it's like a CliffsNotes on the life of Buffett that makes you financially literate and gives you some life skills to boot—but don't sign up just yet for the reality TV show Survivor. :-)
John is a finance professor and investment manager who has met Buffett on four separate occasions. He also teaches graduate college classes on Value Investing, a style of making investments that Buffett follows. He teaches mostly at Rutgers University but also on a part-time basis in the global Executive MBA Program at Columbia University—the same university where Buffett got his master's degree. More precisely, it's a joint Executive MBA program among Columbia, London Business School, and the University Hong Kong, one of the most highly ranked in the world. He's also served as chief investment officer for two billion-dollar-plus investment firms for more than 15 years in total.
Younger people may not want to hear advice from a middle-aged college professor and money manager any more than they want to hear it from their parents. Enter Tyler, a teenage high school student who is learning about personal finance issues in real time. He's completed coursework in financial literacy, economics, statistics, and the Introduction to Business, Finance, and Economics Program for high school students at Columbia University. He is co-author of this book, having written portions of the book, and has his finger on the pulse of teens and young adults to a much greater extent than any college professor. And, perhaps most importantly, his understanding of the concepts in this book acts as an important filter to make sure the book is understandable to teens, young adults, and people new to finance of all ages. Plus, if you see slang words, such as savage, lit, and take the L, used to make the book more readable and less stuffy, that's probably Tyler's influence too. You can also thank him for the handy glossary near the end of this book, so you can brush up on your vocab when you hear a financial term that you don't know. He also contributed some important stories, such as the one related to the Patagonian toothfish that we'll get to in Chapter 11.
What Is Financial Literacy and Why Does It Matter?
Literacy means being able to read and write. The President's Advisory Council on Financial Literacy defines personal financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.” In plain English, it means understanding things related to money and being able to make good financial decisions.
In this book, we'll examine a bunch of concepts related to financial literacy including bank accounts, credit cards, credit scores, balancing a checkbook, the stock market, the bond market, mutual funds, real estate, car loans, student loans, mortgage loans, financial websites, financial apps, retirement accounts, and tips for saving money. But we'll do a lot more than that. We'll also discuss other skills that may be useful in your growth and personal development including communication skills, dealing with adversity, learning from mistakes, and ultimately, helping others.
Some Fundamental Buffett “Tips”
Let's start with some core lessons from Buffett's life, or what we'll call “tips.” We'll start with 10 tips in the first chapter, but we'll cover 100 in total by the time we're done with this book. Some of the tips are direct quotes from Buffett, while others are implied from his actions or words. And we'll make it easy for you, summarizing a list of the “tips” at the end of each chapter, just in case someone forced you to read this book. :-) (You can just skip to the tips and be done with it!) Here's our first tip for building wealth based on the life of the young Warren Buffett.
Imagine having—through your own hard work and not by gift—the equivalent of roughly $60,000 by the time you finished high school. That's some serious coin! Well, that's about what Buffett had, adjusted for inflation, back in the late 1940s.
Inflation refers to rising prices. We'll cover how it's measured in some more detail later in the book, but for now you can assume that the prices of most things rise over time. College tuition is a biggie for most people under the age of 30, or for someone paying the bill. Tuition, room, board/food, fees, and books at top private colleges can run more than $75,000 a year today. But around 30 years ago, the number was closer to $17,000 for these same “name brand” schools. The same dynamic—rising prices—is usually true if you look at the prices of cars, homes, doctor's visits, and a broad mix of products and services that make up the economy.
The sooner you start saving, the more time your money is able to work for you. The interest rate is the rate at which your money grows if you are saving. Or the rate at which your debt grows if you borrow money. We'll cover more on this topic in Chapter 2 and Chapter 3. For now, you can think of interest as a snowball rolling downhill. That's sort of how the book by Alice Schroeder we mentioned earlier, The Snowball: Warren Buffett and the Business of Life, got its title. There's a quote from Buffett on the back book jacket, which says, “Life is like a snowball. The important thing is finding wet snow and a really long hill.” A really long hill is the equivalent of starting early.
One more point on the importance of interest before we move on. A journalist reportedly once asked Albert Einstein, perhaps the most brilliant physicist ever, what he thought was the greatest invention of all time. Einstein purportedly responded, “Compound interest.” Compound interest refers to the interest earned on interest. The “miracle of compound interest,” as it's sometimes referred to in financial circles, explains how small sums of money can grow into gigantic sums of money over long periods of time. It also explains how small debts can snowball into huge debts. Better yet, stay out of debt, if you can avoid it.
Getting back to the young Buffett, his first known business enterprise started when he was only 6 years old! Buffett bought packs of gum—Juicy Fruit, Spearmint, Doublemint, and so forth—from his grandfather's grocery store, and he would go around door to door in his neighborhood selling them at a higher price. A little bit later he set up a lemonade stand near his friend's house, since it had more traffic, and therefore more potential customers. Sharp thinking for someone still in elementary school!
Other early ventures included finding stray golf balls at a local golf course and then reselling them later for a profit. Profit is the money you make from selling an item (also known as revenue), minus any expenses involved in selling the item. In this case, Buffett had no expenses since he got the stray golf balls for nothing, so his profit was equal to his sales, or revenue. This brings to mind a quote that dates back to at least 1860, “One man's trash is another man’s treasure.” While we're on the topic of trash, the young Buffett would often go to the horse racetrack and look for tickets thrown on the ground. Once in a while he would find a winning ticket that someone mistakenly threw away and cash it in. For a short while he also made money at the track selling a “tip sheet”—a list of predictions of which horses would win each race. That is, until the people running the racetrack shut his tip sheet business down. Bummer!
Buffett eventually got a “real” job as a caddy, carrying golf clubs for adults playing golf, at a wage of $3 a day, or about $50 today, adjusted for inflation. And we previously mentioned his paper route and pinball machine businesses that were still ongoing at the time that had him minting money. Needless to say, Buffett got an early start in business in route to becoming a billionaire. If you don't have much money right now, don't worry. Time is on your side, as long as you get started soon, like that snowball rolling downhill. Need more motivation? Consider the words of Lao-Tzu, an ancient Chinese philosopher, who once said, “A journey of a thousand miles begins with a single step.” The previous discussion gets us to our first Tip.
Buffett Tip 1:
Start building wealth early.
Buffett's Work Ethic
John once asked Buffett if he thought a great investor was born or made. Buffett said it was a combination of both. He gave the example of the champion golfer, Tiger Woods, in his prime. Buffett said that Tiger was born with an aptitude for golf, but he also put in an insane amount of practice by often hitting 500 golf balls a day. Practicing hard each day, when combined with his huge natural talent, turned Tiger Woods from a good golfer into a great golfer.
The first part of working hard is simply showing up on time, all the time. Not just when you feel like it, or when it's easy. Woody Allen, the comedian and film director, once said, “Eighty percent of success is just showing up.” In other words, many people aren't responsible and reliable. You can get ahead of 80% of people just by being responsible and doing what is expected of you. That goes for school, work, relationships, and many other activities.
Thomas Edison, inventor of the modern lightbulb, record player (the ancient way we listened to music before we had streaming and downloadable music), and movie camera, said, “Ninety percent of a man's success in business is perspiration.” And, of course, success in business applies to women too. By the way, Buffett is a huge proponent of women in business, as we'll discuss later in this book.
A quote often (incorrectly) attributed to Thomas Jefferson says, “The harder I work, the more luck I have.” According to our research, this quote, or something similar, first came from writer Coleman Cox. Regardless of who first said it, it's good advice. Hard work often gives rise to new opportunities and the skill set to make the most of them, bringing to mind the expression, “Make your own luck.”
We discussed several of the jobs that Buffett had, even before he graduated from high school. Although he liked most of his jobs, clearly they involved some hard work. He had three paper routes when he was in high school, making him the equivalent of $28,000 a year, adjusted for inflation. Buffett estimated that he delivered almost 600,000 newspapers when he was a teenager. With all that throwing, we're surprised he didn't become a professional baseball player. Buffett usually had to wake up before 5:00 a.m. to deliver his papers before school. His family would often return to Omaha during the summers. One summer job for Buffett in his teen years involved him carrying 50-pound bags of animal feed from a railroad freight car to a warehouse. Later, when he became interested in dating girls, he would read about books to develop big arm muscles. Suns out, guns out!
Ashton Kutcher, a hugely successful actor perhaps best known for his roles in TV shows That 70's Show, Punk'd, and Two and a Half Men, said in a 2013 speech at the Teen Choice Awards, “I never had a job that was better than me.” Before Kutcher was a big TV and movie star, he had menial jobs such as sweeping Cheerios dust off the factory floor. And it might surprise you to learn that Kutcher has made many millions of dollars outside of acting, from his investments. For example, he made extremely successful investments in Uber and Airbnb.
Let's turn that advice from Buffett, Edison, Jefferson, and others into our second Tip.
Buffett Tip 2:
Work hard.
Buffett Has Spent a Lifetime Learning
Many of the Secret Millionaires Club episodes ended with Buffett's cartoon character saying, “The more you learn, the more you earn.” It's true, and we'll show you some data to support that quote. Right off the bat, let's turn that Buffett quote into a Tip.
Buffett Tip 3:
The more you learn, the more you earn.
Income, or the amount of money you make from your job and other sources, generally goes up with educational level. A 2019 study by a unit of the US government, The Bureau of Labor Statistics (BLS), examined weekly income levels and unemployment rates by educational levels. Someone is considered unemployed if they are not able to find work and are looking for a job.
The study found that in 2019, someone with a four-year college degree (bachelor's) earned $1,248 a week on average, more than twice the amount ($592 a week) earned by a high school dropout. Not only did the college graduates earn more, they also had significantly lower unemployment rates, making it easier for them to get a job if they needed one. The college graduates had a 2.2% unemployment rate, while the high school dropouts had a 5.4% unemployment rate.
But wait, it gets better for those more educated. People who attended graduate school (college beyond a four-year degree), made even more money and also had lower unemployment rates. The best paid and most likely to find jobs were people who went to professional graduate schools, including doctors, lawyers, and businesspeople. Those holding a graduate professional degree earned an average of $1,861 a week and had an unemployment rate of only 1.6%. If you see someone cruising by you in a Tesla, Mercedes, BMW, or Porsche, odds are they have a professional degree! Table 1.1 provides a summary of the study's results.
https://www.bls.gov/emp/tables/unemployment-earnings-education.htm
Buffett was a strong student, although he had a little bit of trouble with his grades when he first moved to DC, getting a bunch of Cs. He was a bookworm and estimated he read about 100 books, outside of what was required by school, by the time he graduated from high school. He read most of the financial-related books in his library twice! One of his favorites, One Thousand Ways to Make $1,000, was tied to his interest in business. Buffett skipped a grade and was born in August, so he was younger than most of his classmates and graduated high school at the ripe old age of 16.
Buffett graduated from his high school ranked 16th out of a class of 374. His businesses were doing well, and he wasn't keen on attending college but took his father's advice and entered the business school of the University of Pennsylvania—The Wharton School. It's often ranked as the top business school in the US, if not the entire world.
The University of Pennsylvania is one of eight Ivy League schools, which are among the best and most prestigious colleges in the world. The eight Ivy League schools ordered by the year they were founded are Harvard University, Yale University, University of Pennsylvania, Princeton University, Columbia University, Brown University, Dartmouth College, and Cornell University. Buffett spent two years at the University of Pennsylvania but got homesick and wanted to focus on his business ventures in Nebraska. So he finished his undergraduate degree in business administration from The University of Nebraska–Lincoln at the age of 19. He had roughly $100,000, when adjusted for inflation, by the time he finished college. Today, sadly, many college students end up more than $100,000 in debt. In Chapter 14, we'll give you some advice on how to avoid, or at least reduce, this.
Table 1.1 Unemployment rates and earnings by educational attainment, 2019
Source: “Employment Projections”, U.S. Bureau of Labor Statistics.
Educational attainment
Unemployment Rate (%)
Median Usual Weekly Earnings ($)
Doctoral degree
1.1
1883
Professional degree
1.6
1861
Master's degree
2.0
1497
Bachelor's degree
2.2
1248
Associate's degree
2.7
887
Some college, no degree
3.3
833
High school diploma
3.7
746
Less than a high school diploma
5.4
592
Total
3.0
969
A year after finishing his undergraduate degree, Buffett attended Columbia University, another Ivy League university, in New York City. He graduated with a master's degree in economics from Columbia at the age of 20. By that time, Buffett was a budding financial superstar. He received the only A+ in a graduate school class at Columbia taught by his eventual mentor, investment legend Benjamin Graham.
Why Is Buffett Happy?
Buffett is a happy guy, in large part because he loves what he does for a living. He said, “I can certainly define happiness, because happy is what I am. I get to do what I like to do every single day of the year. I get to do it with people I like, and I don't have to associate with anybody who causes my stomach to churn. I tap dance to work, and when I get there I think I'm supposed to lie on my back and paint the ceiling. It's tremendous fun.” We'll simplify that quote for our fourth tip.
Buffett Tip 4:
Do what you love for a living.
Despite the success of the TV show Dancing with the Stars, most young people don't tap dance anymore. For you, it might be doing the Floss Dance, Nae Nae, or Gangnam Style Dance on the way to work. :-) Needless to say, Buffett loves his job, running and making investments for Berkshire Hathaway. That's why he didn’t retire even after he became enormously wealthy. He also likes the people he works with, especially his business partner, Charlie Munger. You can view Charlie as Buffett's BFF, using today's hip language. Munger, another billionaire investor, is 96 and still works too! We'll be hearing a lot more about Charlie over the course of this book, so you may want to remember his name.
One of Berkshire Hathaway's companies is Nebraska Furniture Mart. Its Omaha, Nebraska, store is the biggest furniture store in North America. Yes, they sell furniture, but also a bunch of other items, such as TVs, computers, and refrigerators. They basically sell anything that you might need to furnish your home. Berkshire bought the company in 1983 from its owner, Rose Blumkin, affectionately known as “Mrs. B.” Even though she was wealthy, Mrs. B worked at the Furniture Mart until shortly before her death at the age of 104! For nearly her entire business career, Mrs. B exhibited a tremendous work ethic, often working 7 days a week, 10 hours a day. In her later years, she still worked extremely long hours and used a motor scooter to get around. Now that's commitment!
In one of John's meetings with Buffett, someone asked Buffett what was his favorite place to go. Buffett replied, “The office.” He went on to say that he has vacationed in some nice places around the world, but he'd rather be working than traveling to some distant land. The bottom line is this. If you do what you love for a job, you will enjoy going to work. You're more likely to be successful at your job since you'll probably be very good at it, which will ultimately lead not only to more money but also to greater happiness. We're going to devote Chapter 15 to career-related issues, through the lens of Buffett, of course.
Improve Your Communication Skills and See Your Lifetime Earnings Increase 50%
In another of John's meetings with Buffett, a student asked what skills would be most valuable for having a successful career. Buffett's response? Communication skills. He said, if you have a good idea and can't communicate it well, it's similar to “liking a girl and winking at her in the dark.” Of course, in the dark no one could see if you're winking and, therefore, it would have no effect. He also estimated that having strong communication skills, over time, could increase your earnings power by 50%—an awesome return on your time investment and one that merits a Tip.
Buffett Tip 5:
Develop strong communication skills.
Communication skills include speaking, writing, listening, and interpersonal skills. That is, skills helpful in getting along with, influencing, and leading other people. Buffett said the biggest thing that improved his communication skills was taking a Dale Carnegie course. Dale Carnegie was a self-help guru active during the first half of the 20th century, perhaps best known for his book, How to Win Friends and Influence People. At last count, the book has sold 30 million copies worldwide, so it must be pretty good! We'll devote an entire chapter, Chapter 13, to communication and interpersonal skills, including a large section devoted to techniques taught by Dale Carnegie.
Buffett claims he was a “basket case” before taking the Dale Carnegie course. Although he attended some excellent colleges, such as the University of Pennsylvania, University of Nebraska, and Columbia University, the only diploma he hangs on his office wall is from his Dale Carnegie program.
It might not be fair, but people often form an impression of your intelligence based on the way you speak and write. If you act like a jerk or bully, people won't want to be around you. They won't want work with or for you. Or date you. So take Buffett's word for it. Polishing up and improving your communications skills is one of the most important things you can do to improve not only your wealth but also virtually all other aspects of your life.
Acting with Integrity Is the Right Thing to Do and Good for Business
Integrity means being honest and acting in an honorable and ethical manner. Being a person of your word. Being trustworthy. Being principled. Buffett was never perfect and got into a bit of trouble when he was a teen. But today, Buffett's known for his integrity almost as much as he is known for his wealth and philanthropy. Let's look at a few examples.
In the late 1960s Buffett was investing money for some family, friends, and acquaintances with spectacular results. He was making the equivalent of more than a million dollars a year, adjusted for inflation. However, he decided to shut down his investment business and give investors their money back. Why? He thought the stock market was expensive and that his style of investing was out of favor. In other words, if he didn't think he could do a good job for his investors, he would pass up the chance to earn millions of dollars a year!
Buffett tells his employees to act in a manner such that they wouldn't be embarrassed if they saw their actions written up by a reporter in their local newspaper for all to see. Today, you might substitute “newspaper” for Facebook, Instagram, or Snapchat.
In Berkshire's 1990 Letter to Shareholders, Buffett wrote, “We will behave exactly as promised, both because we have so promised, and because we need to in order to achieve the best business results.” That is, behaving with integrity isn't only the right thing to do morally, it makes for good business.
