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Do You know How Warren Buffett Manages His Wealth? - Outside View by PersonalFN

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Do You know How Warren Buffett Manages His Wealth?
Jan 11, 2019

Warren Buffett.

Benjamin Graham.

Charlie Munger.

Peter Lynch.

Do you know what these names have in common?

These legends are, in my opinion, arguably the most sophisticated, informed, and intelligent investors on the planet.

They might not have topped the Forbes list of the wealthiest men in the world, but their names are at the forefront of any discussion regarding intelligent wealth creation and wealth management.

Unlike others, these investors did not inherit their wealth, have a tech business, or a booming social media business. They created their wealth from scratch and have relied heavily on the financial markets to make them a fortune.

Warren Buffett, famously called 'the Oracle of Omaha', started his wealth creation journey with US$100 at the age of 11. Today at the age of 88, his fortune stands at US$86 billion.

Charlie Munger whose net worth stands at US$1.7 Billion today used to work at Buffett's grandfather's grocery store in Omaha earning US$2 for ten hours of labour.

Peter Lynch, the renowned investor and fund manager, used his college savings to buy shares at US$ 8/share. Currently, he has a net worth of US$352 million.

Apart from being gobsmacked by their journey to wealth, the lessons to be learned here are the importance of persistence and a strong-headed approach to investing.

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It took Warren Buffett 77 years to make US$86 Billion.

Do you think, in these 77 years, Mr Buffett did not have a bad year? Or elections, or bad government or plummeting or rising crude oil prices or a volatile stock market? Of course, he did.

In fact, they all did.

But that did not deter them from their primary goal of wealth creation.

Apart from their huge fortunes, another commonality between these four intelligent investors is their philosophy of wealth. They believe that wealth can only be acquired in the long term, therefore none of them gamble in the short-term; they're investors and do not believe in speculating.

In this article, we will specifically look into the principles these intelligent and sophisticated investors followed to create wealth and how you too can adopt the same principles and create wealth.

  1. "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1" -- This famous quote by Buffett reflects his attitude towards the concept of notional loss. A majority of investors get a panic attack every time the Sensex falls. Rarely do they realise that any fall in the market is a notional loss (not a real loss) as they haven't sold the security yet. Therefore, the next time the markets plummet 1,000 points, remember the concept of Notional Loss!
  2. "Price is what you pay, Value is what you get" -- This is another quote by Buffett expressed to his Berkshire Hathaway shareholders enunciating the importance of active portfolio management.

    There is a lot of free-flowing advice (read noise!) on the internet and on various websites regarding wealth creation and financial planning and investing. But tomorrow if you suffer a gigantic loss on an investment, you can't sue the newspaper or source of the advice owing to a smartly worded disclaimer.

    Accountability is expected from a proper dedicated wealth manager; and hence, paying for one to manage your wealth is crucial.
  3. "Most behaviour is habitual" - This is what Buffett said in a speech to college students, "and they say that the chains of habit are too light to be felt until they are too heavy to be broken." Make good habits relating to money, start early, be disciplined, and most importantly create a habit of being persistent. Essentially, inculcate the ability to stay headstrong even if the world around you is losing theirs.
  4. Maintain cash reserves -- Berkshire Hathaway always has at least US$20 billion in cash equivalent. This strategy helped them stay afloat in the 2008 crisis.

    So, even if you are investing for 10 years, make sure you have ample cash reserves to handle exigencies, whereby wealth creation to accomplish the envisioned financial goals is not hampered.
  5. Set goals for long-term but sensibly -- Buffett has often advocated the importance of investing with multi-decade-horizon. On the journey of creating wealth, you would need money to fulfil intermediate financial goals; therefore, having multiple wealth horizon helps. Multiple-decade-horizon also helps in setting an asset-allocation.
  6. "Invest in what you know" - These valuable words from Peter Lynch famously apply to the "ever-greedy-speculator" in all of us. We get swayed by the tips shared on TV or by friends and invest in assets that we have no expertise in. Invest in things that you know, that are easy to comprehend, and therefore easy to track.

    Just to put things in perspective, Charlie Munger believes Bitcoins to be poison! Let the speculators speculate. You are an investor, stay focused on creating wealth.
  7. "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves" -- This is Lynch's counter argument to investors who wish to time the market. It reflects the mind-set of all investors today who are waiting for the election results in May 2019 and a subsequent fall in the markets to invest.

    A word of advice, don't wait. The markets may have already discounted for the election result and may be ready for the selling onslaught.

    [Read: Waiting To Invest Until The Outcome Of 2019 Lok Sabha Elections? You're Making A Mistake!]

    Invest systematically (preferably via SIPs in mutual funds), be disciplined and, who knows, you too could be the oracle of Omaha of your city!
  8. Charlie Munger has often quoted, "Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail." Invest in good, ethical businesses, and ethical financial planners and wealth managers. These are the organisations that create value in your wealth.
  9. "But investing isn't about beating others at their game. It's about controlling yourself at your own game." These great words by Benjamin Graham warns us about the herd mentality bias, where we invest in whatever friends or relatives or colleagues are investing in without conducting a proper background check. Remember, what worked for your friend may prove to be a debacle for you.

    [Read: Why Mimicking Your Friend's Investments Can Be Risky]
  10. "There is no reason for shame in hiring someone to pick stocks for you. But there's one responsibility that you must never delegate. You, and no one but you, must investigate whether an adviser is trustworthy and charges reasonable fees" - Benjamin Graham. This quote from The Intelligent Investor can act as a gospel to the investors resisting good and ethical advice instead of falling for free-unethical-advice. There is indeed no harm in seeking good, ethical, and unbiased advice and then conducting your evaluations before proceeding with the investments.

Like these four great intelligent investors, you too might be starting from the scratch to build your fortune and may require the assistance of an ethical, unbiased wealth creator and manager. Well, look no further and connect with PersonalFN's Certified Financial Planners and Wealth Managers on 022-61361200 or write to info@personalfn.com. You may also fill in this form, and soon our experienced financial planners will reach out to you.

These were my favourite investment gurus, who are yours and what is your favourite investment principle?

PS: If you need superlative guidance to select mutual fund schemes that have the potential to provide BIG gains, want to do tax planning with ELSS, and want to know which ones are worthy to start a SIP in, PersonalFN has come up with an exclusive three-in-one combo offer. Click here to know more.

Author: Deepika Khude

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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