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What if you could learn financial literacy from Warren Buffett himself?
Finance is a language like any other: the more fluently you speak it, the further-and more comfortably-you travel. And if you want to improve your financial literacy, what better teacher could you have than Warren Buffett? Often described as the greatest investor of all time, Warren Buffett started his investment firm with$100 in the late 1950s and went on to become the billionaire and sage we know today. Along the way he's reaped huge profits for fellow investors in Berkshire Hathaway and remains one of the most sought-after and closely watched figures in the business world.
So how did he do it? In Buffett's Tips, award-winning professor and professional investor John M. Longo demonstrates just how by translating decades of Buffett's writings and media appearances into a 100 straightforward tips and strategies anyone can follow for enhanced financial literacy and independence, including:
Whether you want to grow your personal finances, develop your business acumen, or improve softer career skills such as emotional intelligence, there's no one better to learn from than the most famous investor in the world-and no better way to do that than having a copy of Buffett's Tips close at hand.
JOHN M. LONGO is a Professor of Professional Practice in the Finance and Economics Department at the Business School of Rutgers University. He has also been visiting professor of finance at EMBA-Global Asia-the joint Executive MBA program of Columbia Business School, London Business School, and The University of Hong Kong. He has more than 25 years of professional investment experience and is currently serving as Chief Investment Officer of Beacon Trust, a $3+ billion registered investment advisor. A Chartered Financial Analyst (CFA), Professor Longo earned an MBA in Finance and a PhD in Finance from Rutgers, where he also received his BA degree.
TYLER J. LONGO is a high school student in the Princeton, NJ area. He has completed the Introduction to Business, Finance, and Economics program for high school students at Columbia University and additional coursework in AP Economics, AP Statistics, and Financial Literacy. He has become financially literate in large part due to his work on this book.
Preface xv
Acknowledgments xix
Chapter 1: Who Is Warren Buffett? 1
Introduction 1
Buffett the Teen 2
Who Are We to Write This Book? 3
What Is Financial Literacy and Why Does It Matter? 4
Some Fundamental Buffett "Tips" 5
Buffett's Work Ethic 7
Buffett Has Spent a Lifetime Learning 8
Why Is Buffett Happy? 10
Improve Your Communication Skills and See Your Lifetime Earnings Increase 50% 12
Acting with Integrity Is the Right Thing to Do and Good for Business 13
Buy Low, Sell High 14
Buffett Doesn't Succumb to Peer Pressure: The Inner Scorecard 15
Buffett's Fallback Career-Comedian 17
Buffett's Lasting Legacy: Philanthropy 18
Buffett's Tips from Chapter 1 19
References 20
Chapter 2: Investment Fundamentals According to Buffett 23
Introduction 23
The "Miracle of Compound Interest" Explained 24
Trade-Offs: A Fundamental Principle of Life 27
The Saint Petersburg Paradox: A Lesson on Risk and Return 29
Risk and Return: The Evidence 30
Diversification: One of the Few Free Lunches in Life 32
Supply and Demand Determine Price 33
Summary on Financial Fundamentals 35
Buffett's Tips from Chapter 2 36
References 36
Chapter 3: Bank Accounts, Debit Cards, Credit Cards, and Your Credit Score 38
Introduction 38
Insured Bank Deposits 38
Savings Accounts and Certificates of Deposit (CD) 40
Checking Accounts and Electronic Bill Payment 42
Parts of a Check 43
Balancing a Checkbook 44
Debit Cards and Automated Teller Machines (ATM) 45
Credit Cards and Charge Cards 46
Apps to Send Money: PayPal, Venmo, Zelle, Apple Pay, Android Pay, and so forth 49
Your Credit Score: A Report Card of Your Financial Responsibility 50
Personal Bankruptcy: Try to Avoid at all Costs 52
A Word on Bitcoin from Buffett 53
Buffett's Tips from Chapter 3 56
References 56
Chapter 4: Bonds and Inflation 58
Introduction 58
US Savings Bonds 59
Other US Treasury Fixed Income Securities 60
Inflation and the Consumer Price Index (CPI) 62
Bond Ratings and Corporate Bankruptcy 63
Corporate Bonds, Municipal Bonds, and Bowie Bonds 65
Bowie Bonds and Other Asset-Backed Securities 66
The Federal Reserve: The Central Bank of the United States 67
What Determines Interest Rates? 69
Intuition on Estimating the Price of a Bond 70
So Are Bonds Good Investments? 72
A Note on Negative Bond Yields 73
Appendix: Bond Valuation 74
Buffett's Tips from Chapter 4 75
References 75
Chapter 5: Stock Market Fundamentals 77
Introduction 77
Initial Public Offerings (IPOs): The Birth of a Stock 78
Investment Banks and Investment Bankers 78
The Main Event: The Stock Begins Trading on the Exchange 80
The Stock Exchange 81
A Sidebar on Stock and Mutual Fund Symbols 83
Dividends 84
Large Cap vs. Small Cap 87
Growth vs. Value 88
Domestic vs. International 90
An Index Fund: A Great "Set It and Forget It" Long-Run Investment 91
Beating the Market and the Efficient Market Hypothesis 92
Meet Mr. Market, the Manic-Depressive Stock Market 94
Buffett's Tips from Chapter 5 96
Appendix: Selling Short (or the "Don't Try This at Home" Area of Investing) 96
References 98
Chapter 6: Buffett's Approach to Stocks 100
Introduction 100
Estimating the Value of a Stock 101
Getting a Price Target with the Discounted Cash Flow Model 101
Getting a Price Target with the Wall Street P/E Model 103
Buffett's Approach to Stocks 105
Getting into the Buffett Mindset on Investing 105
Stay within Your Circle of Competence 106
The Importance of Being Patient 107
Good vs. Bad Companies and the Passage of Time 107
How Buffett Thinks About Change in an Industry 109
Types of Businesses Buffett Likes 110
Demonstrated Consistent Earnings Power 111
Look for Companies with Good Management 112
Buy Companies That Have the Power to Overcome Inflation 113
Focus on Firms with Favorable Long-Term Prospects 115
When to Sell 117
Summarizing Buffett's Approach 118
Buffett's Tips from Chapter 6 119
References 120
Chapter 7: Accounting Fundamentals: The Report Card for Businesses 122
Introduction 122
The Income Statement: A Company's Report Card for One Period 124
Apple's Income Statement 125
The Balance Sheet: A Picture of a Company's Report Card Since Inception 129
Current Assets 131
Long-Term Assets 132
Liabilities 134
Current Liabilities 134
Long-Term Liabilities 134
Stockholders' Equity 135
A Quick Note on the Statement of Cash Flows 137
Summary 138
Buffett's Tips from Chapter 7 139
References 139
Chapter 8: Buffett's Approach to Portfolio and Risk Management 141
Introduction 141
The Key to Selecting a Well-Diversified Portfolio: Correlation 142
A (Theoretical) Portfolio with No Risk 143
Selecting an Optimal Diversified Portfolio: The "Business School" Approach 144
Buffett's First Approach to Portfolio Selection: Index Funds 147
Buffett's Second Approach to Portfolio Selection: Expert Mode 147
A Compromise Solution to Portfolio Selection 149
How Many Stocks Make a Diversified Portfolio? 150
The "Business School" Approach to Risk 151
Buffett's Critique of the Business School Approach to Risk 153
Buffett's Approach to Risk 154
Buffett on Gold 155
Summarizing Buffett's Views on Risk 157
Endnote on CAPM 157
Buffett's Tips from Chapter 8 158
References 158
Chapter 9: Business 101: Companies You Should Know 160
Introduction 160
The Dow Jones Industrial Average: The Oldest Diversified US Stock Market Index 161
How the Dow Is Calculated 162
An Explanation of Stock Splits 164
Different Share Classes and Buffett on Stock Splits 166
Current Stocks in the Dow Jones Industrial Average 167
Materials Stocks in the Dow 168
Chevron (NYSE: CVX) 168
Dow Chemical (NYSE: DOW) 168
Consumer and Business Services Stocks in the Dow 169
Home Depot (NYSE: HD) 169
McDonald's (NYSE: MCD) 169
Walmart (NYSE: WMT) 170
Consumer Goods Stocks in the Dow 170
Apple (NASDAQ: AAPL) 171
Coca-Cola (NYSE: KO) 171
Nike (NYSE: NKE) 172
Procter & Gamble (NYSE: PG) 173
Walgreens Boots Alliance (NASDAQ: WBA) 173
Walt Disney (NYSE: DIS) 173
Financial Stocks in the Dow 173
American Express (NYSE: AXP) 174
Goldman Sachs (NYSE: GS) 174
JPMorgan Chase & Co. (NYSE: JPM) 174
Travelers (NYSE: TRV) 175
Visa (NYSE: V) 175
Health Care Stocks in the Dow 175
Amgen (NASDAQ: AMGN) 175
Johnson & Johnson (NYSE: JNJ) 176
Merck & Co. (NYSE: MRK) 176
UnitedHealth Group (NYSE: UNH) 176
Industrial Goods Stocks in the Dow 177
Boeing (NYSE: BA) 177
Caterpillar (NYSE: CAT) 177
Honeywell (NYSE: HON) 177
3M Company (NYSE: MMM) 178
Technology Stocks in the Dow 178
Intel (NASDAQ: INTC) 178
International Business Machines (NYSE: IBM) 179
Microsoft (NASDAQ: MSFT) 179
salesforce.com (NASDAQ: CRM) 180
Telecommunications Services Stocks in the Dow 180
Cisco Systems (NASDAQ: CSCO) 180
Verizon (NYSE: VZ) 181
Some Blue-Chip US Stocks That Aren't in the Dow 181
The FANG Stocks-They Don't Bite 181
China's Emerging Titans 183
Some International Energy Titans 183
Some Global Consumer Titans 184
Some Global Financial Service Firms 185
Buffett's Tips from Chapter 9 185
References 186
Chapter 10: Business 101-Past and Present Business Leaders, or Who's Who in Business 187
Introduction 187
Past Business Leaders 188
Rose Blumkin (Mrs. B) 188
Andrew Carnegie 189
Walt Disney 189
Thomas Edison and Jack Welch 189
Henry Ford 190
Katharine Graham 190
William Randolph Hearst 190
Steve Jobs 191
Ingvar Kamprad 191
Ray Kroc 192
Estee Lauder 192
J.P. Morgan 192
John D. Rockefeller 193
Cornelius Vanderbilt 194
Sam Walton 194
Thomas Watson Jr. 195
Present Business Leaders 195
Bernard Arnault 196
Mary Barra 196
Jeff Bezos 197
Richard Branson 198
Michael Bloomberg 198
Sergey Brin, Larry Page, and Sundar Pichai 199
Shawn Carter, Beyoncé Knowles, Sean Combs, and Andre Young 200
Tim Cook 200
Jamie Dimon 201
Jack Dorsey 201
Bill Gates, Paul Allen, and Steve Ballmer 201
Reed Hastings 202
Kylie Jenner and Robyn Fenty 202
Phil Knight 203
Jack Ma, Pony Ma, and Robin li 203
Rupert Murdoch 203
Elon Musk 204
Amancio Ortega 204
Howard Schultz 204
Oprah Winfrey 205
Mark Zuckerberg and Sheryl Sandberg 205
Buffett's Tips from Chapter 10 206
References 206
Chapter 11: Being Thrifty like Buffett: Ways to Save Money 208
Introduction 208
Your Library: Free Books, Magazines, Newspapers, Music, Movies, and More 209
Free Educational Courses: Khan Academy, Coursera 211
Websites for Free Stuff 212
Free Activities 213
Amazon.com: The World's Biggest Store 214
Comparison Shopper Tools: Your New Best Friend 215
Barter: Turning a Cell Phone into a Porsche Convertible 216
Eat a Low-Cost Meal, Periodically 217
Shop Private Label and Generic Items 219
Clothes: Outlet Stores, Vintage Items, and Buying Off-Season 220
Buying Gasoline 221
Coupons, Double-Couponing, Triple-Couponing, and Groupon 222
Rewards Programs 223
Negotiate with Cell Phone, Cable, and other Service Providers 224
Yard Sales, Flea Markets, and More: Turning Trash into Treasure 225
Do-It-Yourself 227
Donate Things to Charity 227
Avoid Shooting Yourself in the Foot with Bad Habits 228
Tying It All Together in a Budget 228
Buffett's Tips from Chapter 11 232
Appendix: Sample Budget 232
References 233
Chapter 12: Buffett's Views on Cars and Homes 235
Introduction 235
Do You Need a Car? 236
New Cars vs. Used Cars 237
Buying vs. Leasing a Car 239
The Best Time to Buy or Lease a Car 241
Home Basics 243
Finding A Home 244
Bidding for a Home 245
Paying for a Home: The Down Payment 246
Paying for a Home: The Mortgage 248
A "House Hack": Getting Someone to Pay (Most of) Your Mortgage 250
Looking Under the Hood of a Mortgage 250
What Determines Home Prices? 254
Buffett's Tips from Chapter 12 254
References 255
Chapter 13: Buffett on Dale Carnegie, Communication Skills, and Emotional Intelligence 257
Buffett Learns Life-Changing Skills in a Dale Carnegie Course 257
CliffsNotes Version on Dale Carnegie and How to Win Friends and Influence People 259
Things How to Win Friends and Influence People Will Do for You 260
Techniques in Handling People According to How to Win Friends and Influence People 261
Six Ways to Make People Like You According to How to Win Friends and Influence People 264
How to Win People to Your Way of Thinking, According to
How to Win Friends and Influence People 266
What Is Emotional Intelligence (EQ)? 269
Emotional Intelligence (EQ): Some Details 270
Have A Great Posse 274
Buffett's Tips from Chapter 13 277
References 277
Chapter 14: Buffett's Tips for College 280
Introduction 280
College: The Basics 281
Getting into a College 282
Graduate School: Optional for Some Jobs, Mandatory for Others 284
Paying for College: Scholarships and Grants 286
Paying for College: The Three-Year Plan for Super Achievers 287
Paying for College: 529 Plans 287
Paying for College: Student Loans 288
Paying for College: On- and Off-Campus Jobs 290
Your Resume: A Snapshot of Your Qualifications for a Job 291
Putting Together Your Resume 292
The Objective Section 292
The Education Section 293
The Work Experience Section 294
The Skills Section 295
The Activities and Interests Section 296
Cover Letter 297
Buffett's Tips from Chapter 14 297
Appendix 298
References 299
Chapter 15: Buffett's Tips for Careers 300
Introduction 300
LinkedIn Profile: Your Online Resume 300
Finding an Internship or Job 302
The Job Interview(s): Preparation 303
The Job Interview(s): Acing Your Interview 306
The Job Interview(s): Compensation, or Show Me the Money! 309
Succeeding on the Job 310
Financial Paperwork After Getting a Job 313
Forms W-2 and W- 4 313
Form 1040: The Annual Income Tax Form and "The Buffett Rule" 314
Retirement Plans 316
Becoming a 401(k) or IRA Millionaire 318
Buffett's Tips from Chapter 15 319
Appendix 319
Health Benefits Information 319
References 322
Chapter 16: Buffett's Tips for Philanthropy 324
Buffett's Huge Gift and the Giving Pledge 324
Getting Involved in Philanthropic and Charitable Activities 327
Measuring Performance 329
Market-Based Economies Are Good Unless You Wind Up as Roadkill 331
It's Not All About the Benjamins 333
The Loss of Reputation Hurts More Than the Loss of Money 335
Inheritance Matters 337
Buffett's Definition of Success 338
Buffett's Tips from Chapter 16 339
Appendix 339
Charitable Lunch Auctions for Warren Buffett, Benefiting Glide Foundation 339
References 340
Glossary of Financial Terms in "Plain English" 343
Index 393
"I tap dance to work, and when I get there I think I'm supposed to lie on my back and paint the ceiling. It's tremendous fun."
-Warren Buffett, Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012
Everyone wants to be financially literate and, ultimately, financially independent. What better way to become financially literate than to use the mindset of Warren Buffett, likely the greatest and richest investor who ever lived? That's the premise of this book. Through his decades of writings, interviews, and speeches, Buffett has provided reams of advice, but he has never written a book on financial literacy. This book takes much of that material and rearranges it in a way to make you financially literate and puts you on the path to becoming financially independent. It may be the next best thing to having Buffett on speed dial!
Buffett's net worth-the amount of money he would have after paying off any debts-was recently pegged at about $80 billion. But minting money just scratches the surface of Buffett's accomplishments. He'll also go down in history as one of the greatest philanthropists ever. He's giving away virtually all of his money to charitable organizations. If that's not enough, he and Bill Gates-the co-founder of Microsoft-set up the Giving Pledge, an organization where many of the world's billionaires have pledged to give at least half of their wealth to philanthropy. Buffett's also a great guy, a genuine down-to-earth person who enjoys life on his own terms. He also has an amazing sense of humor.
Here's a sample. When asked why he has a diet filled with junk food, Buffett replied, "I checked the actuarial tables, and the lowest death rate is among six-year-olds. So I decided to eat like a six-year-old." In short, Buffett's a great role model for all people, regardless of age-if you can get past his diet.
In this book, we take some of the experiences, quotes, wit, and wisdom of Warren Buffett and apply them not only to issues related to financial literacy, but also to lessons on having a successful life. It's a boot camp on personal finance and life, with the backbone of the book constructed by the lessons of Warren Buffett from his many writings, interviews, and external biographies. Although the topic of financial literacy may be of greatest benefit to teens and young adults, since they are often starting with a clean slate, the concepts are really applicable to people of all ages, especially those without a financial background. You're probably thinking, "What can I learn from a 90-year-old?" A lot! At least in our view. And we promise to make it painless for you and, hopefully, fun!
Buffett wasn't born rich, and he didn't turn into a financial superstar when he was an older adult. The foundation to his success was laid during his pre-teen years. When Buffett was in elementary school, in Omaha, Nebraska, he sold Wrigley's chewing gum and bottles of Coca-Cola-both future investments for him-to make money. He bought his first stock at the age of 11! We'll devote two whole chapters in this book to the stock market, but for now you can think of stock as something that makes you part owner of a business. He filed his first tax return at the age of 13, deducting the costs of his watch and bicycle as business expenses, resulting in a net payment to the U.S. Treasury of $7. Paying taxes is about as exciting as watching paint dry, but they're something you won't be able to avoid down the road, especially if, make that when, you get richer. One of America's Founding Fathers, Benjamin Franklin, once wrote, "In this world nothing can be said to be certain, except death and taxes."
Buffett's father, Howard, was a United States Congressman for 6 years, and Warren moved with his family to Washington, DC, during the 1940s. Buffett got a newspaper route in DC delivering The Washington Post (another future stock investment). By the age of 15 he had used the profits from his business ventures to buy 40 acres of farmland in Nebraska. As a teenager, he and a friend also bought pinball machines and put them in barbershops, splitting the profits with the shop owners. Thus, we hope you can see that the experiences of the young Warren Buffett played an important role, making him the man that he is today.
Well, first we think there's a gap in the teachings of Warren Buffett. He participated in a cartoon series, Secret Millionaires Club, over the 2011-2013 period that provided some simple tips on financial literacy, but not enough to make someone financially competent. Buffett also writes a detailed letter to the stockholders of his firm, Berkshire Hathaway, each year. Stockholders own stock and, therefore, are part owners of a business. You can find Buffett's Berkshire letters going back to 1977 on the web at http://www.berkshirehathaway.com/letters/letters.html.
You may not have heard of Berkshire Hathaway, but you've almost certainly come across some of its businesses. It owns Dairy Queen, GEICO Insurance (the car insurance company with the funny commercials), Duracell batteries, See's Candy, and dozens of other businesses. It's also one of the biggest stockholders in several of the companies that you likely know, such as Coca Cola, Kraft Heinz (maker of ketchup and mac & cheese), American Express, Wells Fargo, Bank of America, Amazon.com, Apple, and many others.
We're guessing you may not want to read a bunch of annual reports and letters to shareholders, even ones as insightful and often humorous as Berkshire's. But we've read them and extracted many nuggets of information that apply to financial literacy and life. There've been several excellent books written about Buffett, such as Alice Schroeder's The Snowball: Warren Buffett and the Business of Life. It's the only book on Buffett that had his explicit cooperation, but at 832 pages, it's almost the size of War and Peace! Plus, these and other excellent Buffett-oriented books and websites assume you know a fair amount about business and finance. This book doesn't take that knowledge for granted and teaches you financial literacy concepts along the way. So one way to think of this book is that it's like a CliffsNotes on the life of Buffett that makes you financially literate and gives you some life skills to boot-but don't sign up just yet for the reality TV show Survivor. :-)
John is a finance professor and investment manager who has met Buffett on four separate occasions. He also teaches graduate college classes on Value Investing, a style of making investments that Buffett follows. He teaches mostly at Rutgers University but also on a part-time basis in the global Executive MBA Program at Columbia University-the same university where Buffett got his master's degree. More precisely, it's a joint Executive MBA program among Columbia, London Business School, and the University Hong Kong, one of the most highly ranked in the world. He's also served as chief investment officer for two billion-dollar-plus investment firms for more than 15 years in total.
Younger people may not want to hear advice from a middle-aged college professor and money manager any more than they want to hear it from their parents. Enter Tyler, a teenage high school student who is learning about personal finance issues in real time. He's completed coursework in financial literacy, economics, statistics, and the Introduction to Business, Finance, and Economics Program for high school students at Columbia University. He is co-author of this book, having written portions of the book, and has his finger on the pulse of teens and young adults to a much greater extent than any college professor. And, perhaps most importantly, his understanding of the concepts in this book acts as an important filter to make sure the book is understandable to teens, young adults, and people new to finance of all ages. Plus, if you see slang words, such as savage, lit, and take the L, used to make the book more readable and less stuffy, that's probably Tyler's influence too. You can also thank him for the handy glossary near the end of this book, so you can brush up on your vocab when you hear a financial term that you don't know. He also contributed some important stories, such as the one related to the Patagonian toothfish that we'll get to in Chapter 11.
Literacy means being able to read and write. The President's Advisory Council on Financial Literacy defines personal financial literacy as "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being." In plain English, it means understanding things related to money and being able to make good financial decisions.
In this book, we'll examine a bunch of concepts related to financial literacy including bank accounts, credit cards, credit scores, balancing a checkbook, the stock market, the bond market, mutual funds, real estate, car loans, student loans, mortgage loans, financial websites, financial apps, retirement accounts, and tips for saving money....
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