Monday, March 9, 2009

Lessons from Warren Buffett's 2009 Shareholder's Letter

Why Listen to Buffett?

What can we learn from Warren Buffett about our personal finances and running our businesses? Much more than I can mention in a brief blog, but I'd like to at least reflect on some practical lessons from his most recent report to his shareholders.

Warren Buffett, the world's richest man (worth over $50 billion), didn't inherit his money - he earned it starting at age 6 selling Chicklets (candy-coated chewing gum) in his front yard. He added to this money from other rather ordinary jobs - caddying, finding and selling golf balls, paper routes, etc. Rather than spending his money, he saved it and began investing at age 11. Fascinated with business and investing, he had read over 100 books on the subjects by high school graduation. So he learned business by both running them and studying them.

In the 44 years that he's invested his money (and other fortunate investor's money) through Berkshire Hathaway, he's averaged yearly returns of over 20%, more than doubling the gain of the S & P 500 during the same time period.

From my study of Buffett, his extraordinary returns come, not so much from his knowledge of movements in the stock market (which he claims are rather unpredictable, particularly in the short term), but from his unsurpassed understanding of businesses. He knows what extraordinary businesses look like; that's how he knows which businesses to buy. So what can we learn from such a financial wizard?


I'm extrapolating here, so don't put this in Buffett's mouth. When he talks of a business doing things right, I'm applying it to individuals.

1. Don't give up. The economy's in shambles, and will probably remain that way for some time. But don't assume life as we know it is disappearing. Plan toward a bright economic future. Over the past 100 years, the free market economic system has worked wonderfully, increasing our standard of living seven-times in the 1900's, while the Dow rose from 66 to 11,497. In his opinion, "America's best days lie ahead."

2. Plan for inflation. The battered economy and bailout by the government will probably result in inflation. (Steve's note: houses rise in value with inflation. If you live in a relatively stable area, like us in metro Atlanta, owning your house and a rental house, if you don't have to incur debt, might be a good idea.)

3. Save massively during the good times, so that you'll have cash during difficult times. Birkshire is in great shape to weather extended hard times, since they stored up huge cash reserves during the good times. Now they can purchase great businesses at bargain prices and help their existing businesses to weather the hard times.

4. Keep your near-term obligations modest. Don't overborrow. Don't live beyond your means.

5. Continue to develop "new and varied streams of earnings."

6. Invest in great leadership. Being the manager of my family and a small business, that means, first of all, increasing my own skills and productivity, as well as my children.

7. Do the basics right. Speaking of Birkshire principles, he praises one of his CEO's for focusing on "blocking and tackling, day by day doing the little things right and never getting off course."

8. Don't buy a house unless you can afford one. If you can't put down at least 10% and if you can't comfortably make the payments on your current income, don't buy it. As basic as this sounds, those ignoring it both from the borrowing and lending side, were major players in the present crisis.

Your ideas? Share them below.