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The editors at Best Finance Schools decided to research the topic of
10 Financial Lessons We Can Learn From Warren Buffett
Feeling in the dark about your financial situation? Who better to listen to than the third-richest man in the world? Learn the keys to success from someone who's no stranger to it.
1. Spend wisely.
- Buffett still dwells in the 5-bedroom apartment he purchased 55 years ago.
- Money invested can earn over 20% annual return.
- Median household income: $45,800 (2010)
- Average spent on frivolous purchases: 15% or $6,870 - enough money to fill up a Hummer gas tank nearly 7x each month for a year
2. No one cares about your money as much as you do.
- Buffett makes all his own investment decisions for his best interests ? not the commission-based interests of financial advisors, stock brokers etc.
- Over 1 in 3 Americans works with a financial planner
- But 45% of Americans have no financial plans
- 7% don't even have goals or strategies they would use
3. Do your homework: scan thousands of stocks.
- Buffett spends 18 hours a day working on investment capital, saying investors should think of themselves as partial owners.
- 'Never invest in a business you cannot understand.' - Warren Buffett
- 40% of Americans say they're financially literate, but 1 in 3 Americans couldn't correctly answer this question:
- $100 is in a savings account with a yearly interest rate of 2%. After 5 years untouched, how much money is there?
- A: More than $102
- B: Exactly $102
- C: Less than $102
- (Answer: A: More than $102)
4. Overcome your fear of risk.
- Americans are afraid that investing will cause them to lose money, but Buffett says stocks outperform bonds, banks and even gold, and are safer, too.
- 'Risk comes from not knowing what you are doing.' - Warren Buffett
- 29% of Americans are too risk-averse to invest in stocks
- 52% of those under age 31 feel the same
- Yet for nearly 90 years, leading stocks have averaged 10% annual returns
5. Focus on the long term.
- Putting off saving/investing means you'll need to save more in less time for the same outcome.
- Buffett equates life to snowballs; think of investments the same way:
- 'The important thing is finding wet snow and a really long hill.' - Warren Buffett
- Compare Scenarios:
- Saver 1:
- Starts saving at age 21
- Puts away $500/month through age 30 through 9 years
- Gets 7% annual return
- Reaches $1 million by age 65
- Saver 2:
- Starts saving at age 31
- Put away $500/month through age 65 - 34 years
- Gets 7% annual return
- Reaches $1 million by age 65 - by contributing $150,000 more over the years
6. Invest in quality businesses.
- The result of doing your homework is determining worthy companies. Buffett is famously invested in Coca Cola, Wells Fargo and IBM.
- 'An investor needs to buy the stock as if he is buying the whole company down the road.' - Warren Buffett
- Remember Enron? It used to make headlines in a good way...
- Average lifetime of a Fortune 500 company in the 1960s: 75 years
- Average now: 15 years or fewer
7. Hunt for exceptional bargains for solid companies.
- Buffett recommends buying stock during a crash, when even great companies have extremely low prices.
- Analyze performance, mission statements, business process, long term goals and more.
- Fewer stocks can be better, so invest more time in more research, rather than more stocks.
- 5 valuable stocks can yield 71% of the benefits of a fully-diversified portfolio
- 15 valuable stocks can yield 87% of the benefits
8. Make decisions to invest based on how well money is being used by company management.
- Buffett feels penny-pinching indicates a profitable mindset. Once, he acquired a company whose owner took the time to discover his toilet paper roll wasn't really the advertised 500 sheets!
- Assess these for the best picture:
- Return on Equity (ROE): Company's net profit divided by shareholder's equity
- Return on Capital Employed (ROCE): Company's earnings before interest & tax deductions (EBIT) divided by the result of its total assets minus current liabilities
- Ideal condition: ROE and ROCE are about equal
- Over 40% of Americans report having made investment decisions based entirely on emotion
- Nearly 1 in 2 men have done so
- 1 in 3 women have done so
9. Be patient; wait until everything is in your favor to invest.
- When conditions align, buy an appropriate amount of shares. Buffett recommends holding stocks in 10-15 companies.
- In bad times, hold on. A quality stock should recover and you won't have to regret selling prematurely.
- 'I think the worst mistake you can make in stocks is to buy or sell based on current headlines.' Warren Buffett
- 57% of retirement-age Americans have financial regrets
- Biggest financial regret for millionaires: poor stock decisions (10% regret this)
10. Sell losing stocks when the market is up; buy winning stocks during a crash.
- Selling a dud stock at its worst adds to your loss, and purchasing a great stock at peak price cuts your gains.
- 'The beauty of stocks is they do sell at silly prices sometimes. ... That's how Charlie [Munger] and I got rich.' - Warren Buffett
- 25% of Americans track the ups and downs of the stock market at least weekly... but 17% think the market is too complicated and 11% just don't know where to begin.
With these tips from guru Warren Buffett, you don't have to take part in financial fear anymore. Go forth and invest wisely!