Warren Buffet, also known as the Oracle of Omaha is a legendary investor that pushed the tenets of value investing to the limelight. His investment decisions, leadership, and lifestyle provide valuable life/business insights that can help people improve their odds of attaining financial freedom. More importantly, his annual letters to Berkshire Hathaway shareholders often yields tons of insight into the thought processes that helps him to make his enviable decisions. This article seeks to apply four of Warren Buffet’s quote to personal finances.
1. Risk comes from not knowing what you are doing
Many people are afraid of taking risks and the fear of taking risks is more evident in their habits. Most folks talk about wanting to invest without actually getting around to putting money down for investments because they are afraid of losing their money. However, the risk-reward dichotomy can be split into four basic scenarios. Ideally, no risk brings no reward, low risk investments yield low rewards, medium risk investments bring medium returns, and high-risk speculative investments tend to attract the highest returns.
Warren Buffet however brings another dimension to the risk-reward relationship in note that “risk comes from not knowing what you are doing.” In essence, you’ll need to ensure that you fully understand any investment into which you want to put your money. Andre Fabianski, an analyst at Saxon Trade agrees that “investing in something you don’t understand is a recipe for losing your money irrespective of the ideal risk-reward quotient of the investment.”
2. Price is what you pay and value is what you get
Many people often sucker up to promo offers such as “buy two, get one free” to spend money on stuff they don’t need just because it is on sale. Warren Buffet submits that you should think in terms of price and value when you spend money because price is what you pay and value is what you get in return. If you don’t need a toaster and you buy one for $50 because it is 50% off from its retail price of $100 – you might think that you’ve saved $50 but in reality, you have actually spent $50.
It doesn’t matter if you use cash or credit, any money you spend remains spent. In fact, you can’t spend the same dollar more than once; hence, you need to ensure that you’ll get value (utilitarian, spiritual, emotional, or psychological) from any dime you spend.
3. Someone’s sitting in the shade today because someone planted a tree a long time ago
Saving for the rainy days sounds cliché but the reality is that many people forget the fact that the proverbial rainy (even stormy) days are to be expected. Rainy days can come in the form of a sudden job loss, downsizing into a less-paying position, medical emergency, a failed transmission in your car, or retirement. It is important to keep a positive outlook on life but you need to stay proactive with an emergency savings fund to tide you over during the blues.
Warren Buffet says, “someone’s sitting in the shade today because someone planted a tree a long time ago “. We all know that the best time to plant a tree was 20 years ago; the second best time to plant a tree is today. You should start saving up money today.
4. You only find out who is swimming naked when the tide goes out
Many people are living fake lives that do not reflect the reality of the true state of their finances. The fact that credit is readily available in the U.S. and Europe makes it especially easy for people to fall into the vicious cycle of keeping up with the Joneses. However, having the ability to borrow money is not financial freedom, true financial freedom is your ability to maintain your standard of living and stay free from debt.
Warren Buffet says, “you only find out who is swimming naked when the tide goes out”. In essence, you don’t need to keep up with the Joneses because you never can tell if the Joneses have a twenty million trust fund and you’ll still need to pay the piper if you fund your lifestyle with debt.