Buffett Bites

I have followed Warren Buffett since college when I took my first real investments class. He has been revered by many, but also accused by many as being old fashioned and past his prime. However, as the accusations keep coming the one constant is that his company Berkshire Hathaway has continued to outperform most other inhabitants of this earth. He has consistently outperformed the competition all while sticking to a few simple and honorable principles. It is funny when I look back at my blog and see how many times I have mentioned his name and the many more times I have cited advice which parallels the Buffett maxims because I actually spend very little time managing my investments. But I guess the lack of time I put into investments is symbolic of the approach that I take. If you don't have the time to dedicate to extensive research then you are probably better off just investing in index funds, investing for the long haul, and gladly taking the gains that the broad market enjoys over time. This is a classic Buffett nugget of advice for passive investors worldwide and it is one I have heeded. Here are a few other Buffett bites of wisdom from the MSN Money homepage:

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.

Value, value, value. "In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market -- and what that business earns in the succeeding decade or two."

Don't get suckered by big growth stories. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."

Diversify your portfolio. Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Buffett wrote.
"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."

Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue."

Timely advice from Buffett for turbulent times.

Get Rich In The Military: A Real Life Example

A while back I wrote guest blog post for the site Bizzia entitled Get Rich in the Military. The post was a summary of some of my personal beliefs surrounding money and how you can exploit some of the unique opportunities you have serving in the armed forces. I hadn't really gone back and read the post in a long time but the other day I got an email that had me go back to revisit it. The email I received was from a fellow Air Force member named Jared. He spoke about how he has transformed his outlook on money and began achieving his financial goals. It was great for him to reach out and to allow me to post his story. I think his story is a great example of how achieving your financial goals is much more about your mind and a few simple habits than any complex system or knowledge. If you treat your circumstances as opportunities, don't make excuses, and keep your overall happiness as the ultimate goal then i think success is inevitable. Jared definitely is subscribing to the BadskiBlog definition of what true wealth is and it is great to see him succeeding. Thanks for taking the time to email me!

Matt,

My name is Jared, I'm Active Duty AF and currently in contracting career field. I'm currently an E4 and will sew on staff next month. I like what you had to say about finances and the military.

I have been very fortunate and blessed in the last year and a half.. First off I'm in a very hot career as I believe your in the same one too. Next I have no bills (except for cell phone) and rent. I do agree buying a house is good but when I'm only using half my BAH for rent then I think renting may be the best option. I just re-enlisted with the 7 SRB they were offering. I'm investing most of that money now. On top of that I got a sweet assignment to Moron Spain where the COLA is very generous. I'm going to invest all that too. I've deployed 2 times in 4yrs and have paid off all credit cards and my truck. No sense in getting a new vehicle mine runs fine. I'm single w/ no dependents so I can save half my paycheck every month. I have sworn to never get in credit card debt again. I had over 10 thousand in credit card debt alone at one point.

So to boil this all down I joined the military 4 1/2 yrs ago with a total of 30 grand in debt to now having 2 Roth IRA's with 10 plus grand in each and over 50 grand in my bank. And you know what....it was all in the military and I only reenlisted for 4 years and I'm only an E4. I'm finishing up my business degree and the military has literally paid for all of it as I try to get my books free from a library.

I'm completely blown away with the power of money and your completely right it's all about looking at an investment in time, ownership of your time, your life.

I'm not here to brag at all, in fact I'm just amazed and tickled. If people would take your advice and stop whining about being in the military and look for the upper hand of it all you would see a lot more military millionaires at the end.

I now give advice to young Airman and telling them...it can be done!! I started late too as I joined when I was 27 yrs old and now I'm 31.

Thanks again and hope to hear back your thoughts.

Jared

Finding Balance In Your Finances

“The best and safest thing is to keep a balance in your life, acknowledge the great powers around us and in us. If you can do that, and live that way, you are really a wise man.” - Euripides (Greek playwright, c. 480-406 BC)

Balance is something that I struggle with daily. As a man of passion it is easy to get swept from one extreme to another, and finances are no exception. I came across a great post on Get Rich Slowly the other day that offers some great insight into the topic of balance in your personal finances called "Financial Balance Lets You Enjoy Today AND Tomorrow." Below are some of the main points of the post but do yourself a favor and read the entire post as I am sure you will find some of yourself within it.

Finding balance
In order to find balance, you’ve got to do some soul-searching. I think of it as a three-step process:

Find what makes you happy. Look inside yourself and ask, “What is it that brings meaning, pleasure, and joy to my life?” Be honest. How can you create a life that features more of the good stuff and less of the mundane?

Focus on your goals. Set personal goals based on the things that make you happy. If you like music, maybe one of your goals could be to learn to play the guitar. If you want to change careers, maybe one goal would be to go back to school. Make meaningful goals a priority, and let the other stuff be secondary.

Seek balance. Strive for moderation in all things. Pursue your goals, but don’t forget frugality. Be frugal, but don’t forget your goals. Work hard to build your financial fortress — but let yourself have a little fun, too.

The balanced money formula
One tool that I’ve embraced for the past year is the balanced money formula introduced by Elizabeth Warren and Amelia Tyagi in their excellent book, All Your Worth: The Ultimate Lifetime Money Plan.

Here’s what it looks like:

As you can see, when your financial life is in balance, you’re allocating enough for savings and needs, but you’re also setting some aside for the things you want. This idea is simple, but it was a revelation to me. No more spending too much on wants, but no more pinching pennies, either.

I really like this outlook. On the one hand the majority of people can relate to the struggle my fellow Oregonian went through with compulsive spending. But on the other hand I am sure many can also relate to becoming obsessive regarding saving and investing to the detriment of your daily happiness. I know that sometimes I go the opposite way and get stressed out if I am not saving enough or investing “enough.” Sometimes the percentages can be deceiving. “I am only saving 10%, I am not saving enough, I will never get to X,Y, or Z,” your brain might be saying. That is why I really enjoyed the visual representation of what it takes him to be balanced. It helps to focus and provide structure to your spending habits without becoming obsessed and disrupting that mental balance that is necessary for your happiness.

When I start to get stressed about how much I am saving and investing I think back to one of the main lessons from the ever-insightful classic The Richest Man In Babylon by George S Clason. The book states that saving a mere 10% over a lifetime is a surefire way to reach your financial goals. If you haven’t read that book, read it now. It’s about 100 pages set to a backdrop of what I would describe as Aladdin meets personal finance. Pretty interesting, very simple, and timeless.

If you are getting stressed that you are only saving X percent, keep in mind that you are probably doing better than most in the sense that you are actually keeping more than you spend. As I have stated before on BadskiBlog, if you are keeping more than you spend then it is only a matter of time until you reach your financial goals. If you don’t like how long that timeline is you can either spend less or make/keep more. It is an iterative process that is definitely more challenging mentally than tactically. Maybe I am a product of my generation and our culture in that patience is not one of my strongest virtues, however I have to remind myself that my wife and I are saving more than a quarter of our income and we are still living the life we want to live as far as experiences go. Which brings us to the most important lesson from the Get Rich Slowly post.

The quest to achieve financial balance is about more than money. It’s also about meaning. Money is important, yes, but it’s not the only thing. Money is a means, not an end.

Money is a means, not an end. I love that. Remember your goal is happiness and living the life you envision yourself wanting to live. That can start today….as in NOW. You can work on your personal finances by slowly course correcting over time, but you need to enjoy life now. That is why the concept of balance is so important and like most things it must be worked on over time.

Personal MBA Update

I just finished reading "I Will Teach You To Be Rich" by Ramit Sethi this weekend and it was a pretty impressive book. Ramit Sethi maintains the blog iwillteachyoutoberich.com; one of the blogs that I enjoy and follow. The book is targeted towards 20 to 30 somethings early in their financial journey, however I would say that it is a solid read for anyone that doesn't know where to start on their financial journey.

For me this book didn't offer any mind blowing technical knowledge. Any college graduate majoring in business possesses the basic knowledge imparted by this book. But I think that is what Ramit intended! Personal finance isn't book smart hard, it is discipline and will power hard. Where Ramit's book sets itself apart is the well thought out general theorem and the overall practicality of the advice. Anyone who doesn't know anything about personal finance could pick up this book and, with some self discipline, be on their way to reaching their financial goals.

I must say that part of the reason I liked the book is that I agree with about 99% of what Ramit preaches. Ramit just does a hell of a lot better job at tying in all his beliefs and concepts into one book. The only area that I disagree with the book about is regarding real estate. And it is not so much disagreement, since the more I read his passage on real estate the more I think I know the message he is trying to portray. He is trying to say that your house is not an investment and buying a home may not be the best choice for everyone. I would say that your house is not an investment while you are living in it, however when you are buying it you should treat it as such. I am a big proponent of the value of real estate and am excited to get my next property, and I think that although the book's advice is solid and warranted it may scare off some younger people who should be looking to buy a home or purchase an investment property. The section is pretty short so maybe I am just overreacting.

The book does an awesome job of formulating a system that works, both numerically and more importantly psychologically. This is where young people will really relate. He is not saying to cut out all the fun in your life. He recommends a system to save a certain amount, and reaffirms that it is OK, nay almost encourages, you to blow the rest on things that you enjoy. Whether that is food, vacations, or shoes is irrelevant. I couldn't agree more and I currently practice a very similar system. You can read more on my mentality on my money tips post here.

Overall, the book kicks ass. The read is easy, there are some funny off color remarks, and the theory parallels my own which I think (although biased) is pretty solid. I will likely recommend it to my buddies and acquaintances that are looking for a place to start. It is also a great book to have on the shelf to make sure you are sticking with those good habits. Check the book out. Here are my notes from the book.

- Why money and food are similar: We don't track calorie intake. We don't track spending. Eat more than we know. Spend more than we realize-or admit. Debate minutiae about calories, diets, and workouts. Debate minutiae about interest rates and hot stocks. Value anecdotal advice over research. Listen to friends, our parents, and TV talking heads instead of reading a few good personal finance books.
- You don't have to be an expert to get rich. You do have to know how to cut through all the info and actually start.
- Info glut; too much info leads to decision paralysis
- ....As the number of mutual funds in a 401(k) plan offered to employees goes up, the likelihood that they will choose a fund-any fund-goes down. For every 10 funds added to the array of options, the rate of participation drops 2 percent. And for those who do invest, added fund options increase the chances that employees will invest in ultraconservative money market funds. I made a note that I do the same thing at NJ diners. There are 200 number choices and I can't even begin looking because I am too overwhelmed.
- The single most important thing a person can do to be rich is to start early. See Time Value of Money Chart on page 5
- "Why does just about everything written about personal finance make me want to paint myself with honey and jump into a nest of fire ants? Personal finance advice has been geared toward old white men and taught by old white men for far too long. I don't understand why newspaper columnists continue to write about tax-optimization strategies and spending less on lattes, hoping that young people will listen. We don't care about that. We care about knowing where our money's going and redirecting it to go where we want it to go. We want our money to grown automatically, in accounts that don't nickel and dime us with fees. An we don't want to have to become financial experts to become rich.
- A lot of financial problems are caused by one person - you!
- For all those that blame gov't, CEOs, evil banks, etc. have any of them ever read even 1 personal finance book?
- More important to start than to spend exhaustive amounts of time researching the best fund in the universe
- Instead of "how much money do I need to make?" say "what do I want to do w/my life and how can I use money to do it?"
- Why do you want to be rich? What does being rich mean to you?
- Our biggest purchases are made on credit. Good credit is the first step in building a good financial infrastructure.
- One key difference between rich people and everyone else is that rich people plan before they need to plan.
- Table on page 17 showing how credit affects what you pay.
- While other people spend many hours cutting coupons, growing food in their gardens to save on grocery bills, or being frugal with lattes, they're failing to see the bigger picture. It's fine to be frugal, but you should focus on spending time on the things that matter, the big wins.
- If you pay your entire bill on time, its actually a free short term loan (credit cards) easy to track spending free warranty extensions and rental car insurance
- Avoid card offers in the mail. www.optoutprescreen.com
- Avoid cash back offers because they don't pay, travel is better
- Friends brag about saving $10 on clothes while you silently save thousands by improving your credit score
- Pay on time, its the most important thing you can do. 35% of your score depends on it.
- Automate payments. You can get email and you can adjust the amount to pay in full.
- Eliminate fees - negotiate a lower APR - keep cards a long time and keep them active.
- Get more credit if you have no debt for a better credit utilization rate - 30% of score
- Use your rewards
- Avoid closing your accounts. You have less available credit and the same amount of debt.
- Pay down student loans www.dinkytown.net
- Consumerismcommentary.com
- Albert Einstein "Compounding is mankind's greatest invention because it allows for the reliable systematic accumulation of wealth."
- Ask your friends how much they have invested
- Millionaires invest 20% of household income each year. Wealth is measured by how much they have saved and invested over time.
- The Ladder of Personal Finance: 1. Contribute just enough to get 401(k) match. 2. Pay off cards and any other debt 3. Open Roth IRA and max it out 4. Go back to 401(k) and go above the match level up to the limit 5. Invest a non retirement account, pay extra on mortgage, invest in yourself
- Its not budgeting, its a conscious spending plan - Spend and invest enough and spend the rest guilt free
- Fixed costs 50%-60% Investments 10% Savings 5%-10% Guilt free spending 25%-30%
- websites on pg 109
- Lifehacker.com
- Americans love experts but being an expert is supposed to be all about results
- In 2001 Frederic Brochet ran a wine study. 57 experts evaluated on red and one white wine. After tasting the two they described red as intense, deep and spicy which are common to red wine. They described the white as lively fresh and floral which are also common. Not one expert picked up the fact that they were the same wine. The red was just some of the white wine with food coloring.
- You can beat the so called experts on your own but it takes guts because you have no one else to blame but yourself
- In an S&P study from 1983-2003 the market had an annualized return of 10.01%. During that period if you missed the best 20 days your return would be 5.03%. If you missed the best 40 days your returns would equal 1.6%. The only solution is to invest regularly putting as much as possible into low cost diversified funds.
- Yale's David Swenson said "Ive got 20 professionals here in New Haven devoting their careers to identifying high quality active management opportunities. An individual who devotes a couple of hours a week in the evening, at most, trying to compete with institutions that have armies of people out there? It just doesn't make sense."
- Survivorship bias does not include funds that fail. Only survivors.
- The perfect stock picking record. Email 10,000 people half about stock A and half stock B. If A goes up eliminate stock B group and email stock A group about C and D. Do the same again. And again. You now have 1250 people who see that you can pick two stock successfully. Each cycle is awed by the ability of the advisor. Don't trust the experts.
- Blogs on page 152
- Ask an actively managed fund or broker only one question, "What were your after tax after fee returns for the last 15 to 20 years?" They will not give you a straight answer because they will be admitting that they didn't beat the market.
- Warren Buffett "Be fearful when others are greedy, and greedy when others are fearful."
- 90% of your portfolios volatility is a result of asset allocation
- William Bernstein "Since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because it is the only factor affecting your investment risk and return that you can control."
- Your investment plan is more important than your actual investments
- "I believe that 98 or 99% - maybe more than 99% - of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs." Warren Buffett
- "When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long term index investor," Mark Hulbert
- "The media focuses on the temporarily winning active funds that score the more spectacular bulls eyes, not index funds that score every year and accumulate less flashy, but ultimately, winning scores." W. Scott Simon
- Links on page 197
- Ventureloop.com is craigslist for startups

Trump on Child-rearing?

I came across this article on Ivanka Trump yesterday. Say what you will about the Donald but I think the way his children turned out speaks volumes about what he is all about. Now I am not saying that the way children turn out is all attributed to the parents. But I do think it is a very large and important part. 

I have read a few books that talk about wealthy parents and their fear that their kids will not have the same outlook on money and more importantly the same work ethic as them. The millionaire mind is a book about the common attributes among America's real millionaires, the balance sheet millionaires. The book actually shows that the overwhelming majority of millionaires in this country are self made. The book shows that very few have any significant wealth inherited through their parents. I am sure this is contrary to popular belief, but it seems as though many wealthy fear that their kids will squander what wealth they have acquired. Warren Buffet spoke on this very topic on the CNBC special I watched a while back and he spoke about how he wasn't planning on leaving his kids any of his wealth. When asked why he said something along the lines of, "why would I do that? What good would it do them to inherit that much money? It would ruin them?"

That's why I like Trump. He has the very brash New York side that I think he really plays up on TV. But his actions show that he is a competitor that likes to win. I like that his ultimate insult is calling someone a loser. To him that is the ultimate low. I think that is awesome. I am aware that his marital history isn't what most people would call picture perfect. Well his business history isn't either. But I think the article above shows that he raised his kids right in a situation that many in his shoes could not.