What Would Warren Buffett Do?
Published on - April 16th, 2008 (Modified on - May 6th, 2008) (by J.D. Roth) 
You folks have been sending me a lot of Warren Buffett stuff lately. I appreciate it. Buffett is one of my financial heroes, and I love to soak up his advice. Because I don’t have room to highlight all the Buffettology that comes my way, I’d like to briefly point out two of the stories.
First, Vincent sent me an article from Fortune magazine about what Warren Buffett thinks. A lot of people like to put words in Buffett’s mouth, but he’s not shy about sharing his secrets. If you really want to know his philosophy, the best thing to do is listen to him speak (or read what he writes). Fortune sat in with a group of business students as Buffett talked to them about economics and investing. My favorite Q&A:
What advice would you give to someone who is not a professional investor? Where should they put their money?
Well, if they’re not going to be an active investor — and very few should try to do that — then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.
Buffett has said this time and time again, which is why I’m baffled when people use Buffett as a reason to not diversify. I am not Warren Buffett. Neither are you. Unless you have Buffett’s combination of patience and intense research, you’re better off putting your money in an index fund. (As one reader recently noted, if you can afford to buy a share of Buffett’s company, Berkshire Hathaway, you’re getting the best of both worlds: a diversified portfolio picked by Warren Buffett!)
Meanwhile, Tim Clark at Soul Shelter shared some billionaire lessons in prosperity-building. Clark’s brother attends Berkshire Hathaway events in Omaha every year, and provided the following anecdote from the 2006 shareholders’ meeting:
One shareholder asked a question along the lines of “how should I study investing in order to build wealth in my spare time?”
Buffett replied that, for most people, the bulk of their income is going to come from earning power in their chosen profession. Therefore, from the standpoint of building wealth, free time is better spent sharpening one’s professional skills rather than studying investing.
I also love the story from Clark’s brother about seeing Warren Buffett and Bill Gates dining together in a cheap Omaha steakhouse. Buffett’s frugality is legendary. Sure, he built his wealth through shrewd investments, but he kept his wealth through thrift. Buffett is a reminder that frugality is not a dirty word.
Previous Buffett-worship at Get Rich Slowly:
- The billionaire next door: The wisdom of Warren Buffett
- Questions and answers with Warren Buffett
- In defense of Warren Buffett
I’ve saved a couple other Warren Buffett pieces to share in the future, including his advice for market downturns.
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Warren Buffet is my hero too. He still lives in the same house he bought in the 70′s. He is a person that personifies the use of wealth to live as he chooses, not to be known for the trappings and toys of wealth.
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He understands the true value and power of the dollar. As a steward of finite resources, he’s a role model for the Get Rich Slowly reader. Slow and steady wins the race…
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I heard a story once about Buffett. He was eating lunch with a friend at a great steak restaurant in Omaha, but the car wouldn’t start after their meal. The other man was also wealthy, but both were too wise to own a cell phone that cost $50 /month, and both walked to the nearest pay phone to make a toll-free call.
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I thoroughly enjoy reading Buffet’s annual reports from BRK.a. You could also find his earlier letters from the Buffet Partnership from the 1950′s and 1960′s. One of them gave two specific examples of stocks that Buffet invested in, the criteria that he used and what the outcome was.
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Liz,
Warren didn’t buy his house in the 1970s: He bought it in the 1950s. Though he does have the massive California oceanfront house as well…And a private jet…
And what’s up with people talking about him eating at cheap steakhouses all the time? As if that’s a frugal thing? I can’t even afford eat at cheap steakhouses once a week!
Also he inherited an insane sum (though not billions) from his father (Congressman and businessman) and he went to the University of Pennsylvania. Not a “modest” start.
I admire Warren as much as anyone, but I wouldn’t say he is a Silas Marner, and I wouldn’t say he’s really a model for the rest of us trying to get rich slowly on five-figures.
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It was a NICE steak house, not a cheap one [are there any cheap ones?], but he had LUNCH there, not dinner, frugal for a billionaire, I suppose. The point was he invests that $50/month instead of sending it to the cell phone company, even though you’d think a million people would need to get ahold of him at any time (or vice versa).
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Alex, I think the myth of Buffett is what attracts people. I haven’t actually read a biography of him yet (I have one in my stack of stuff), so I don’t know a lot about him — just what’s shared in the media. But what I’ve read/seen so far has really motivated me!
Also — I love the Silas Marner reference. George Eliot is one of my favorites.
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That is a good quote of Mr. Buffett.
He is certainly an exception, but most people will never beat the market indexes over time. I laugh at the people who are 2 or 3 years into buying individual stocks for the short term claiming how their system “always” works!
They usually lose in the end!
Great article Trent!
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Warren Buffet is my single favorite investor. I still have a hard time understanding how people can use him as a reason not to diversify, supposedly because he’s “concentrated” in Berkshire Hathaway. Completely senseless, of course.
Investing success “secret formula”? Index funds dollar cost averaging time = wealth
Of course I won’t be making headlines anytime soon with that formula
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It all depends on what you mean by ethics. Warren Buffett has done some things that I would never do, though other people might consider these actions to be smart business practices.
One company where I worked was a subsidiary of a large foreign company (and even had the same name). The foreign company made the mistake of owning only about a third of its subsidiary. Buffett showed up one day, having just purchased an even larger share of the operation, and demanded that the foreign owner cough up large amounts of money to get control of its sub. Which they did. All of this was perfectly legal and smart business, but just a little bit sleazy from my perspective.
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Buffett’s frugality is legendary and funny at this point. I guess he’s a creature of habit, but at this point he can afford to splurge a little. A “cheap Omaha steakhouse” – wonder if that is cheap like Outback (cheap to a billionaire) or cheap like Sizzler (cheap to a thousandaire)? I believe he did break down and buy a Cadillac last time he needed a car – but it was a CTS, not the most expensive model. But I have to applaud him springing for a Cadillac – I think he deserves it. I’m all about being frugal, especially if you are young and saving for a prosperous future. But when the prosperous future has been attained I think you should live a little.
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@NOYB
Yes, I’ve heard tales of Buffett’s business policies and their consequences, most notably at the original Berkshire Hathaway itself. A reader wrote to share the story of family members who worked there. Though I have a stars-in-my-eyes image of the man right now, I know that as I learn more about him, some of my illusions will be shattered…
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My first finance professor was from Omaha and always had a buffett story.
He would sit in a diner, and every once in a while talk about the companies he was researching. A few locals would run off and buy those stocks in hopes he would soon too.
I know he loves Cherry Coke, and bought into Coke because he loves the product.
JDs right though, its these stories that make him so admirable.
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“As one reader recently noted, if you can afford to buy a share of Buffett’s company, Berkshire Hathaway, you’re getting the best of both worlds: a diversified portfolio picked by Warren Buffett!”
… ‘one reader’ is WRONG! By buying BRK-A or -B, you are:
1. Buying only ONE stock, admittedly one that has performed well in the PAST and MAY (or may not) perform well in the future, and
2. Buying into only a partially-diversified conglomerate.
Stick to low-cost index funds … ONLY buy any individual stock – including Berkshire – IF you know what you are doing.
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Good point, AJC. If only Buffett were immortal. Or at least had an expected lifespan longer than mine…
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I’m still surprised at how “common sense” long term investing is. Buffet is not giving away some secret that none of us knew. It just proves that if it ain’t broke don’t fix it.
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RE: Buffet & Steak
My story (Post #3) was about Gorat’s steak house in Omaha. Dinner steaks run up to $25, maybe more, but they have lunch steaks for under $9, hence the frugal choice of eating steak for lunch instead of dinner.
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But what would Jimmy Buffett do?
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I’m a big index fund fan but I use more than one. I still think it is important to diversify among different asset types.
As for spending time learning about investing vs. spending time on your professional skills, I also like to diversify my learning so I will still keep reading and learning about investing.
I know that probably was not what he meant…Sorry Mr. Buffett!
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AJC, Berkshire may not be as diversified as the S&P 500, but it’s diversified aplenty. As an owner of B shares, I do see risk, particularly in its insurance business, which is a signficant part of Buffett’s strategy, but BRK is still significantly diversified and cheaper than even an index fund. In many ways BRK offers the best of both worlds–reasonable diversification coupled with the active management of Warren Buffett. FYI, the BRK shareholder’s meeting is coming up on May 3rd.
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For a guy who has amassed a great deal of wealth, he’s not flaunting it and lives well below his means. If it was all about the stuff, we’d be reading and watching all over the news…Also, let’s not forget that the wealth he inherited was NOT frittered away like some famous heirs have known to do. Again, he is a model for GRS: he weathered the storm over the long haul and continues to do so.
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I have two Warren Buffett stories.
I was standing near him while he was signing autographs. A young teenage girl told Mr. Buffett her father owned Berkshire Hathaway long before he did. Without blinking an eye, Buffett replied: “Well, if your father knows about any other great businesses, have him call me.”
Buffett arrived about 30 minutes late to the Berkshire Hathaway shareholders meeting. Walking across the stage wearing a cap with ear flaps, a plaid hunting jacket, and snow boots (think Elmer Fudd), he apologized for arriving late: “Sorry I’m late, but I missed my bus.” Before I left Omaha, I found out seniors get to ride the bus for a quarter.
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@Joe G:
Parrot-heads unite!! LOL
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I agree but I`d add something.
Don`t let your capital shrink more than 15 % from the peak. In that case, convert your money to safe funds and never stop purchasing whatever pundits tell you.
GL
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I always marvel at how the advice to buy Index Funds is given to “rookie” investors. The very reason the stock market has done so well over the past 50 years is because of the massive influx of dollars thru 401Ks, etc. As long as you have millions of workers pumping their $200 or $400/month into the stock market, it will continue to rise in value. What about buying on fundamentals? The stock market is still an inherently risky investment — and an index fund does NOT shield you from it.
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The Oracle is correct…do what you love and you will achieve success beyond your dreams.
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Huh. I’ve never done that before. Managed to overwrite an entire old post with a forthcoming new post. Most of the glitches lately have been because of WordPress. This one is squarely on my shoulders. I wonder if I can recover this.
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Gotta love the Google cache! Five minutes for a repair!
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