In the wake of having published his annual shareholder letter, this post details money takeaways and investing insights from Warren Buffett. Prized for his frugality and admired for his keen eye for investing, the Oracle of Omaha serves as an excellent role model to successfully pursuing financial independence.
Warren Buffett Investing Insight #1 – Net Worth vs. Savings Rate
What Warren has continued to do for decades is focus on earnings. He doesn’t pay any particular attention to trendy fads or flashy tech promises — but instead, he focuses on operations of a business and the earnings that business produces.
Warren does NOT focus on the bottom line because he knows how it can be manipulated.
The analogy for the average money-minded individual is they focus on their bottom line or net worth.
As individuals pursuing more financial freedom in our lives, tracking our net worth is great, as it can be encouraging to see the numbers improve over the years.
As Warren has articulated time and again, the danger with only tracking net worth is paramount. Our net worth, as our assets grow, becomes more and more tied to the ups and downs of our investments — instead of the ups and downs of our lifestyle choices.
For me, this lesson was reinforced the other day when a conversation with a client revealed his 2018 goal; to reach a $500k net worth.
We walked through his saving and investment strategy. We were discussing taxes when the “aha” moment occurred.
If the market doesn’t return at least 11% in 2018, his goal would not be met.
The goal for the entire year was set to a metric he had ZERO control over.
After this realization, he decided to shift his goal from hitting a net worth of half a million to saving and investing a percentage of his income each quarter. Now this goal is just within his reach instead of being subject to market whims. If he reaches the goal or falls short, it will be 100% because of the actions he took and not because the market went up or down during the same year.
We can all take a page from Warren’s book by focusing on our own earnings as opposed to our net worth.
Warren Buffett Investing Insight #2 – Investing in Himself
Warren Buffett once wrote a check to attend a Dale Carnegie public speaking course. It resulted in the greatest* investment he’s claimed to have ever made.
I speak to this same concept in a recent YouTube video. If you haven’t seen the channel yet, my wife and I have been putting together 1-minute videos on money advice based on the questions from the blog or directly from clients.
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Warren Buffett Investing Insight #3 – Focus & Circle of Competency
When asked about the #1 key to success, both Warren Buffett and Bill Gates, famously wrote down the same answer at the same time:
But what does focus look like?
For Warren, his focus on the art and science of investing has come in all shapes, sizes, and forms.
On his own honeymoon, Warren decided to bring along a STACK of annual reports from companies known as 10K’s.
My wife would not stand for this overwhelming degree of romance.
Chances are you don’t have to focus to that degree — and that’s probably a healthy thing!
What’s the result of all this focused effort? Warren describes it as his Circle of Competence and it’s likely the largest principle that’s benefited my life (second to my overall learning from Buffett).
Warren’s Circle of Competency represents the area Warren knows.
Just as critically, Warren Buffett is not shy to admit it when he doesn’t know the answer or that he doesn’t understand something. This is the area just outside the Circle of Competency and starts to include investments he wouldn’t touch with a 10-foot stick.
So be like Warren and focus on what brings you a high ROI and develop it as a true circle of competence. Just as critically, know what’s outside the circle and DO NOT focus on anything that will not become a part of your circle of competence.
Warren Buffett Investing Insight #4 – Opportunity Cost
The final insight is likely the greatest one in terms of investing our money and even our time.
The #1 question Warren Buffett asks himself before every investment is…
“What is my opportunity cost?”
In other words, this is what we are giving up. If we decide to eat a pizza, then you can say our opportunity cost is eating a salad. If we invest in Stock A then our opportunity cost is not having invested in every other option available.
With so many great insights to pick from, I had to narrow it down to 4 and share some of the more meaningful items I’ve picked up from such an exemplar of frugality, money savviness, and of course, a remarkable intellect when it comes to investing.
What investment insights or general money principles have you picked up from Warren Buffett over the years?
*By “greatest investment”, the story is this…During the Dale Carnegie public speaking course, there was a weekly prize of a free pencil awarded for the course attendee who demonstrated he had learned the most the previous week. Warren, being one who was eager to win and win big, decided it was his chance to use what he had just learned to craft his proposal to his wife. She said yes…and Warren got the pencil for that week!
P.S. I’m running low on money questions to answer for our YouTube channel so, I’m re-opening the survey where you can submit your questions or topic suggestions by clicking here.
My wife and I have been answering reader questions via our daily YouTube clips. If you want to see more of Distilled Dollar — subscribe on YouTube and let us know what questions you have on savings, investing, tax optimization strategies, increasing your income, or anything related to personal finance.