Warren Buffett is recognized as one of the world’s greatest investors and is well known for parlaying a modest sum of $6,000 at the age of 15 into a massive fortune of $6.7 billion today. Over the years, Buffett has given countless interviews on his financial philosophy. Here, we’ve distilled Buffett’s best insights on how to succeed at managing money.
Buy value at low cost
Buffett is famous for finding bargains that the market hasn’t yet caught up to and beating the market to grow wealth. He reminds us that “[p]rice is what you pay [and] value is what you get”. Always do your research, and never pay for something that’s priced higher than what it’s really worth. Better yet, find something priced low that’s of good value. As Buffett once advised, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”.
Live simply and spend wisely
Buffett advocates a simple life without excessive consumption. He advises investors to start early, live below their means, and avoid excessive consumption. For example, Buffett still lives in the same home he bought in 1958 for US$31,500 (US $250,000 in today’s dollars and currently valued at under US $700,000). As he says, “Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends”.
Invest your profits
Buffett advises investors to reinvest rather than spend their profits. Buffett demonstrated this principle as a high school student when he grew a small but successful pinball machine business by successfully reinvesting his profits rather than pocketing and spending what he’d made.
Know what you’re doing
Buffett summed up this point in his commonsensical style when he said, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”. He says that as an investor, you should take charge of your own investments and understand what you’re doing. ‘Risk’, he says, comes from not knowing what you’re doing. He clarifies that you should be able to explain why you’re making the investment you’re making. “And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it”. In summary, if you don’t understand an investment, don’t get into it, no matter how attractive other people might claim it is.
Watch your habits
Buffett advises people to develop good money habits and watch out for the bad ones. “Chains of habit are too light to be felt until they are too heavy to be broken”, he has said. Try viewing your spending, saving, and investment behaviour as habits, and check for any patterns that are hindering your wealth-building goals. Work on changing these habits until you develop more positive ones.
Mitigate risk by holding plenty of cash
Buffett has often said that cash is important, and his company Berkshire Hathaway (BH) usually has at least US$20 billion in cash equivalents in case it’s needed. This risk-averse approach means there will probably be gains that BH misses out on because that money was held rather than invested, but it also means that his company is insulated against economic downturns such as the 2008 GFC. As he wrote to BH’s shareholders, “Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”.
The average investor should use low-cost index funds
Buffett’s view on index funds for the average investor has been well publicised. “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% of people who start investing at the same time”, he said in 2004. Writing in 2013 to BH’s shareholders, he stated, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund”. More recently, he’s said, “Just making monthly investments in a low-cost index fund makes a lot of sense”.
Consider yourself as an investment
Buffett has also said that everyone should invest in themselves, through education and development. “Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power”, he has said. He also suggests that having the right people around you will help you grow as well: “Pick out associates whose behaviour is better than yours and you’ll drift in that direction.”
Set goals for the long term
According to Buffett, investing is a long-term game, and successful investors set goals for the long term rather than trying to catch the best deals for the short term. “Invest with a multi-decade horizon”, he advises. “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time”, he says. Don’t buy if you’re not in it for the long term or will be unhappy if the market shuts down for ten years. “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes”, he says.
