14 Money Quotes from the Birthday Boy, Warren Buffett

August 30th was America’s most-loved business tycoon’s 89th birthday. He made his fortune (US$82 billion as of July 18, 2019) investing in and helping to build American businesses.

I won’t waste your time diving into Buffett’s background (Wikipedia does a good job), but I will say his wisdom on investing, money and business management is sought by many (including President Barack Obama, as you can see in the pic above).

Here are some of his best gems:

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.”

“The stock market is designed to transfer money from the active to the patient.”

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

“It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”

“You’ve gotta keep control of your time, and you can’t unless you say no. You can’t let people set your agenda in life.”

“The investor of today does not profit from yesterday’s growth.”

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” (Note: Interestingly, Buffett’s company, Berkshire Hathaway, currently holds about $122b in cash.)

“I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.”

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

“There comes a time when you ought to start doing what you want. Take a job that you love. You will jump out of bed in the morning. I think you are out of your mind if you keep taking jobs that you don’t like because you think it will look good on your resume. Isn’t that a little like saving up sex for your old age?”

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”


Who Are Your Real Friends?

Question: What is important in life? Friends? Family? It’s definitely not material things. Unless you live a wildly opulent lifestyle, the history books won’t remember what kind of shoes you had. They’ll remember you for the kind of person you were and for the things you did. Historians will write about your relationships, decisions and experiences.

So let’s agree that your relationship and experiences with friends and family are the most important things in life.

Now who are your friends and family? Who are the people that will be there for you when the sh!t hits the fan. The people who will help take care of you when you’re recovering from knee surgery. The people who will mourn you for months or years when you are dead. These are the people you should be dedicating your time and energy to. Yet, we spend 8+ hours a day with a group of people who behave in a friendly manner, call themselves ‘family’ but who couldn’t really care if you were there or not. We call these people ‘work colleagues’.

Throughout your career you may pick up a few really good friends, but most of your work colleagues will drift away once you move on. I think there’s nothing wrong with this, so I’m not trying to be a downer. I’m simply trying to help you realize that there are people out there who appear to be your good friends but really are not. This doesn’t mean you should be unfriendly to them. Simply recognize that some friendships have more depth and longevity than others.

Moral of the story: If you think friends and family are the most important things in life, you need to ensure you are committing your free time to the right people.

This is why I take my kids places on the weekends. This is why I try to go home from work as soon as I can.


Trapped at Work?

There are some that truly thrive in a corporate environment. There are many who simply go with the pace. And then there are some who hate it and feel trapped, yet remain nonetheless. Today, I’ll talk to you about the third group.

Somehow I’ve met a lot of people throughout my career that are stuck working a job they dislike in a corporate environment. Most have unfulfilled dreams of entrepreneurship or significance that never materializes. Work in real life is not like the movies – I’m sure Wall Street (the movie) motivated many wide-eyed youth to join Wall Street (the financial district), only to realize that beneath the sexy veneer exists mundane tasks, bosses with moronic ideas and colleagues you’d never associate with outside of work. To people who had a youthful dream this reality can hit them quite hard and they can become depressed or even passive aggressive.

These people don’t simply quit and pursue their dreams for many reasons. Some are in debt, some have families and others are simply too scared to take the plunge into entrepreneurship. So they feel trapped.

Let me end the sob story here. Nobody should feel sorry for these people.

1. Most of these people are doing things most citizens of the world could only dream of. Or said differently, they’re not doing things the rest of the world is forced to do: work in dangerous environments with minimal protection for crappy pay. If you’re safe and making an average wage in a developed country you are the envy of much of the world.

2. These people still have a choice. Financial independence (or what I sometimes call ‘career independence’) can be a long-term goal, requiring long-term planning. People in debt are often in debt because they don’t have the discipline to get out of debt. If debt is keeping someone at a job they hate, they should cut their spending and pay off their debts. Many people are trapped because they are too lazy and undisciplined to change their predicament.

3. Those who are truly trapped should learn to play the game. We get one life and can only walk down one path, so make the most of it. If a person is trapped in a box they should make that the best box they can. When properly understood, a corporate environment is actually one massive social and psychological experiment. What it takes to succeed often has little to do with competence at a specific function. Instead, success in a corporate environment is driven by understanding and manipulating the motivations of your colleagues and superiors. People who hate their jobs but are stuck can treat their career like an social experiment or psychological game. This might make the entire experience more interesting. Of course, shifting to this kind of attitude can be difficult for those who truly want to make a difference.

Having said all this, ideally one never enters a situation that they dislike in the first place. I will write more about that later, but it is critical that young kids and teenagers make career choices based on a true understanding of what they’re getting into. For those already stuck in the rat race, it’s not half as bad as you think.


Don’t Let Unlikely Events Financially Wreck You

Yesterday I caught my kid running down the middle of a long flight of stairs, nowhere near the handrail. I told my kid that if she fell she would have no way to stop herself and would probably smash her face or something.

Her response: “I do it all the time…nothing has ever happened before.”

At that moment, I realized this is a very common attitude among adults towards potentially catastrophic risks:

  • People don’t wear their seat belts because they think they’re good drivers and have never been in an accident.
  • People don’t save their money because they’ve never been laid off and think that if they were they could easily find another job.
  • People don’t wear bike helmets because they’re careful and have never wiped out.

As a DumbWealth reader, I want you to think differently.

Unfortunately, some bad things only have to happen once in your life to ruin you. One car accident, one major change to your employment prospects, one tap by a passing car can devastate your life. Sure maybe the odds are in your favour, but by thinking these things could never happen to you you’re gambling with your life, wealth and happiness.

Think about it another way. If you were to get into an accident without wearing a seatbelt, become a paraplegic and later found out you would have been fine if you had only worn your seatbelt, would you have any regrets? Probably.

People take low-probability but catastrophic risks because they focus on the odds and not the potential outcome. Just because something has never happened, it doesn’t mean it never will. There are no ‘do-overs’ for when a low-probability but catastrophic event occurs. Probabilities don’t care that you were right 99% of the time.

Moreover, many people believe they have more control over their lives than they actually do. Unfortunately, even the most skilled motorcyclists can be nicked from behind by a distracted driver. Within the past 3 years alone, I’ve personally known two motorcycle riders that died in relatively minor accidents that weren’t their fault. Both were part of a motorcycle culture that believes careful riding can prevent accidents. The reality is the destiny of even the most careful motorcyclist is actually in the hands of all the other drivers around them.

People also take low-probability but catastrophic risks because the warnings are mostly third-hand. People don’t often have friends or family who have been through such events and can serve as a direct warning. This is partly because these events are rare, but also because when they do occur often the victim is no longer alive (or mentally capable) to spread the warning.

This isn’t just about motorcycle riding and running down stairs. People also take potentially catastrophic risks with their finances.

Many people ignore the big risks that could result in devastating losses. Instead, they focus on the potential gain or the probabilities, as if they were buying a very expensive lottery ticket. However, they often fail to anticipate the impact of a bet gone wrong.

True, it is unlikely that any particular company goes bakrupt. But if it does, your investment may be wiped out – a catastrophic loss in anyone’s book.

When investing, you need to assume that you know less than you think. You need to be less confident in your bets, and therefore invest smaller amounts in each investment. Ideally, you also need to spread your money across risk factors as well. Diversification: that’s the DumbWealth way.

Over the years, I’ve personally learned my lesson. I’ve had many ‘sure things’ crash and burn. My saviour was always diversification.

Spread your money across many investments, many asset classes and many risk factors, so you can live to fight another day when you inevitably are wrong about one assumption or another, and so you’re not crippled by an unlikely, but catastrophic, event.

Even if you have a long winning streak , don’t forget that its all a gamble. Don’t start to think you’re some kind of investing genius. More than likely your success is due to luck…and luck runs out. People that spend their entire careers trying to outsmart the market fail. So what makes you so especially talented?

Bottom line: diversify because you’re not as skilled at avoiding low-probability but catastrophic events as you think.


Buying Something? Sleep on It!

One of the reasons I started DumbWealth was to help people take simple actions to live a richer life. While some of my articles might dive into more complex concepts, many are straight-forward and driven by simple common sense. 

Since we all won’t become billionaires, we must learn to make the most of the cards we currently hold in our hand. And that means we need to make everyday decisions that set us on the path to financial freedom. 

Reduced to its essence, this means spending less than you earn. To help accomplish this, one habit I teach people is to delay discretionary purchases. 

“Sleep on it,” I say.

Why? Because it helps us make better decisions.

The brain needs time to process complex decisions. Sleep helps do this, as it’s biology’s way of cutting out the noise. 

Have you ever had a problem that seemed insurmountable, only to have the solution jump out at you after a good night’s sleep? That’s the kind of clarity you need when making purchase decisions. It’s basically the same reason you aren’t supposed to buy groceries when you’re hungry. 

Marketers love it when you aren’t thinking clearly. They want to do the ‘thinking’ for you. They know that you’re more likely to spend your money if you make decisions using your stomach, ego, hormones or emotions. They want you weak and tired so you are more likely to succumb to their influence.

Take back control by delaying your purchases. If you’re in a store and are about to buy a pair of shoes, put them back down, go home and give it a few days. 

Based on my unscientific experience…

…40% of the time you’ll forget about it.

…35% of the time you’ll decide you don’t really need or want to make the purchase.

…15% of the time you’ll find a better deal.

…10% of the time you’ll go back to the store and buy the shoes.

If you do this consistently, you’ve cut your discretionary purchases by at least 75%. Your mileage may vary, but you get the picture.

Half the battle when building wealth is controlling your spending. It doesn’t matter how big your income is, you won’t get rich giving all your money away. Slow down your purchase decision process. This will make it a lot easier to spend less and build wealth.


Beware of 10 Year Fund Performance Data

The Global Financial Crisis of 2008-2009 was a shocking reminder of what risk looks like. Markets around the world plummeted and volatility skyrocketed. The banking system almost shut down and we came close to experiencing another Great Depression. 

Despite the unusual nature of the financial crisis, market declines of 20-50% do occur somewhat regularly. (Another market decline of a similar depth occurred only six years before the 2008 crisis started.)  Consequently, it is prudent to factor in these types of declines when examining the long term market performance track record of any mutual fund or ETF. 

When investment fund companies display returns for mutual funds and ETFs regulators force them to show 1 year, 3 year, 5 year and 10 year returns (or since inception, if the track record is shorter than 3, 5 or 10 years).

Important note: Fund companies are not obligated by the regulatory bodies to show returns beyond 10 years. This means you might not be getting the full picture – especially if the longer track record looks weak.

Until recently, funds with a 10 year track record incorporated the period that included the Global Financial Crisis. The bottom of the crisis occurred in March 2009, so until March 2019 at least some of the crisis was captured. Now that March 2019 has passed, 100% of current 10 year performance data occurred during a bull market. In other words, despite a few market jerks along the way, 10 year data no longer includes a full market cycle and no longer illustrates the full range of what an investor might experience. Current 10 year time series is effectively a case study in the ‘best case’ investing scenario.

Chart 1 illustrates the impact the financial crisis had on long term returns calculations. The bars show the worst 1 year return for the preceding decade. Until recently, the worst 1 year return occurred during the financial crisis (-43%) and was captured in 10 year time series. With the financial crisis dropping off the 10 year time series, you can see the dramatic improvement in the worst 1 year return on the right side of the chart.

Chart 2 shows how rolling the financial crisis (and the worst 1 year return from Chart 1) off the 10 year time series impacted 10 year returns. The spike on the right hand side of the chart coincides with the worst 1 year period falling off the scale. Indeed, average 10 year return has risen from the high single digits to the mid teens.

This is a deceptive representation of long term returns since it is no longer grounded by a bear market – a normal occurrence during a full market cycle.

Chart 3 illustrates how the financial crisis impacted 10 year volatility as measured by standard deviation. Again, you can see how the 10 year volatility dramatically declines once the data that includes the financial crisis rolls off. 

Losing the Global Financial Crisis off 10 year historical data means investors are no longer getting the full view of how a mutual fund or ETF performs during a market cycle. Not only is this misleading with respect to long term risk-return analysis, this potentially has an impact on how investment fund companies define the risk profiles of their products.

Regulatory documents require companies define the risk level of their products. While not perfect, standard deviation is the commonly accepted quantifiable measure of risk. The recent dramatic decline in 10 year volatility will probably mean that fund companies re-rate their funds as lower risk than before. Meanwhile, the fund itself hasn’t changed. This would be like saying a car is safer now because it hasn’t been in an accident in 10 years. Nothing about the car has changed…it is simply operating within a safer environment.

Same car. Same fund. But you can be sure as sh!t that fund companies will use this more attractive data to their advantage when marketing their products. Even fund companies that don’t purposely mislead will still inadvertently do their investors a disservice by under-reporting risk ratings for their products. After all, what company would voluntarily communicate the risk levels for their funds are actually higher than what the regulators force them to communicate?

Now – more than ever – the warning rings true: past performance is not indicative of future performance. And, if you can, try to evaluate your investments using data that captures a full market cycle.


What Successful Senior Executives Realize

Entering the workforce can be intimidating at first because you’re suddenly surrounded by knowledgeable, competent experts, while you only know what you learned in school (much of which doesn’t equip you for the workplace…but more on that another time). However, what I have discovered during my working life is that most employees are simply putting on a good show. Sure, they know all the jargon, processes and history of a company or industry, but they really don’t know much beyond what can be laid out in an instruction booklet.

Corporations need people who can follow instructions because they are the muscles and ligaments that move a corporation. In contrast, senior leadership requires expertise and foresight beyond the known. They need the ability to synthesize thousands of pieces of seemingly disparate information into a cohesive strategy. Said differently, there is a set of employees that follow instructions and there is a set of employees that write the instructions. When it comes to writing the instructions most people are simply making it up along the way. The employees following instructions need to feel like they are following the correct instructions. So those writing the instructions require conviction, confidence and consistency…even if they are dead wrong.

I have discovered that the key to success in a corporate environment has nothing to do with competence or expertise. Instead, those who can form a convincing narrative out of a random assortment of information will thrive. People who are willing to shape the unknown and ambiguous into a framework for others to use will become the future leaders.

Many senior managers realize they are making things up along the way, and that they are taking a chance on one strategic path of thousands of possibilities. There really is no way around the uncertainty of strategic planning, but those who do it best are the ones that acknowledge their limitations and have the confidence to alter course when it makes sense.


2 Things You Should Always Do At Work

Of course, there are many habits that will help you become successful in your career, but here are two that have helped me: 

1. Write lists. This helps you remember and track what needs to be done and what has been completed. Lists will help you become someone that delivers and gets things done. The psychology of a list puts pressure on you to finish things on the list. No list? Tasks are easily forgotten and dismissed. 

2. Be early. I’m not a morning person, but there have been periods in which I was the first one into the office every day. During those periods I felt like I was a couple steps ahead of everyone else. By the time other people strolled in an hour or so after me, I would have already completed a number of tasks. Also, I’d have a coffee under my belt so I’d be fully awake while the later arrivers drag their arses around. Being early also gives the general impression that you have it together and that you’re a hard worker. Hell, go to work early and just read the news if you want. You’ll still benefit from the perception. For me, another reason to show up early is because I am super-productive in the mornings – I’m fresh and there are few distractions. What takes me 10 minutes at 8am seems to take 40 minutes at 5pm.


5 Things You Should Never Do At Work

There are many things you should never do at work, but here are a few of the less obvious:

1. Don’t insult anyone. You never know when you will need them to help you.

2. Don’t talk about politics or religion. These kinds of conversations are divisive and political and religious debates are unwinnable. These are subjective topics with no right answer – ironically, everyone with an political or religious opinion seems to think they have the right answer. Don’t even go there.

3. Don’t fall in love with your coworkers. Go into work with the mindset that you are there for business. If, for some reason, you still manage to go crazy for a coworker recognize that you may need to find another place to work if you decide to pursue the relationship. Many companies don’t like coworkers having relationships because of the conflicts of interest that arise.

4. Don’t screw your coworkers. Especially if they are married. Do I really have to explain this one? Still, it happens more often than you’d expect and I have seen careers ruined because of tarnished reputations.

5. Minimize the profanity. Highly-selective swearing can be effective in the right situation with the right people. However, swearing properly is a skill many lack. Those who don’t do it properly lose credibility and sound like uneducated buffoons.


You Have Less Time Left With Loved Ones Than You Think

Let’s say your mother was 30 when you were born.

From birth to age 20 you see your mother every single day. After age 20 you move a couple hours away and see your mother three times a year (5 days each) for a total of 15 days. This means that the time you spend with your mother throughout your life is heavily weighted to your early years.

Today you are age 30 and your mother is 60. Your mother will live to age 80.

Did you know…

– 96% of the time you will ever spend with your mother has already happened

– Thus, 4% of your relationship (in terms of time) with your mother remains

– You only have 60 visits with your mother until she dies

Cherish the time you have left with the people you love. Call your mom today. She probably misses you and fondly recalls the time when you were a part of her daily life.