wise words from warren and how they apply to us!

A few weeks ago, Warren Buffett, Chairman, President & Chief Executive Officer of Berkshire Hathaway ($BRK.A), released his annual letter to shareholders reviewing the company’s performance and sharing his ideology. My biggest takeaway from the letter was the scalability of Warren’s advice. Although he was talking about managing billions of dollars, his principles can be applied to managing my money as well. I’ve organized this article by topics I’ve discussed previously and incorporated how Warren’s principles can work for us.

MARKET INSTABILITY Berkshire Hathaway’s equity holdings are valued at nearly $173 billion at YE 2018. Despite this enormous number, Warren shared that he focuses on operating earnings and pays little attention to the swings of gains and losses—the same as what I’ve been taught.  While market swings and changes in portfolio value can seem daunting while they’re happening, it is important to keep future value in mind.  Although the markets are constantly changing over short periods of time, in the long run they’re still on the rise.  Warren writes that he has “no idea as to how stocks will behave” but that he focuses on “whether a portion of an attractive business is worth more than its market price.” Great advice for the question “What’s the hot thing to buy?” or “When is the best time to invest?” Of course, I’ll maintain the “Buy Low, Sell High” mantra, but the truth is there is more in assessing the long-term value in a company as explained by Warren Buffett.  

Also in the letter, Warren maintains that Berkshire’s stock price is the best indicator of performance.  How much is that stock worth? About $303,000!

DIVERSIFICATION Another lesson that I’ve written about that Warren also mentions is diversification. Warren writes: “A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty.”  This is why a diverse portfolio is important.  I’ve used the example of a gift basket in talks before.  The more exposure you have across industries, companies, sectors, and holdings, the more protection you have in the event that any of those holdingsgoes rotten.  For a company as large as Berkshire, with over $700 billion in assets, it’s much easier done to “focus on the forest and forget the trees.”  For us, it’s appropriate that we keep track of the holdings we have and make sure our exposure matches our risk appetite. In this section Warren also mentions buying “ably-managed businesses”—a reminder of his philosophy of being sure to invest in companies that are under sound management. Ethics in management and reporting are clearly paramount in importance to Warren and his team, as evidenced multiple times in his letter.

DIVIDENDS Retained earnings by way of reinvested dividends were a highlight of Berkshire’s 2018 performance.  Money retained by the businesses held by Berkshire translates into more capital to invest with. When we elect to reinvest our dividends, that is capital that our businesses can continue to use to grow. Although we don’t get the instant gratification of a dividend payout, we do (or at least could) get the benefit of the company’s ability to use that money to invest and grow—leading to an increase in stock value and our wealth. 

EMERGENCY FUND This section might have been the most surprising and entertaining to me.  Beyond equity holdings, Berkshire Hathaway also reports having $112 billion in bonds and cash equivalents.  Warren writes: “We consider a portion of that stash to be untouchable, having pledged to always hold at least $20 billion in cash equivalents to guard against external calamities. We have also promised to avoid any activities that could threaten our maintaining that buffer.” Sounds like an emergency fund to me!  At any level of wealth, it is important to have cash on hand to insure yourself against life’s unexpected happenings.  Whether it is a new prescription, set of tires, leaky roof, or job discontinuity, an emergency fund can help you stay out of debt and aligned to your financial goals. 

COMPOUND INTEREST Lastly, Warren Buffett writes about how Berkshire Hathaway’s value has benefitted from compound interest by way of the growth of the American economy.  Warren shares that if they would have followed a 100% payout policy, they would still have the $22 million in equity capital they started with in 1965 as opposed to the $349 billion they have today because of compound interest.  I have shared many charts and figures about the wonders of compound interest and the effect it has on the ability to build wealth.  The sooner you get started investing and capitalizing on compound interest, the better! 

Under the section “The American Tailwind,” Warren shares a story about how he bought his first 3 shares of stock at age 11 and what they would be worth now, dividends reinvested. I encourage you all to go and read that story starting on page 12.  My dad made sure that my little brother and I were investors as soon as we were born. Even though those of us reading this article are no longer infants, it’s not too late to start investing and teaching the next generation to do the same.  Building wealth is accessible for all of us. We have instant access to apps that have no minimum requirement and websites that manage portfolios for fractions of the usual cost.  Warren Buffett’s annual letter certainly inspired me to continue on my investing and financial education journey and I hope it does the same for all of you!

Berkshire’s 2019 annual meeting will take place on Saturday, May 4th and is available to watch via Yahoo’s webcast.

 Have a prosperous week!

March 11, 2019

Pay Yourself First

This is a lesson that my grandparents taught my mom when she was growing up.  Pay yourself first before you start giving your money away.  Think about it like this—you get your paycheck and you pay your necessities: rent, bills, debt.  Then what do you do? More than likely, you go pay other people. Change that habit and start to pay yourself first.  Your “future self” will thank you.

Why is this important? First, you’re investing in YOU. You will get to benefit from the savings you put aside, and if you plan for even further into the future, generations to come will benefit from it as well.  Second, if you don’t invest in yourself, who will?  Sure, you get a paycheck for the work that you do, but that’s only one source of income.  When you invest, you generate additional income through returns and dividends—your money starts working for you.  

The sooner you begin to invest, the more wealth you will be able to build over time.  Compound interest is your friend and time can be as well, you just have to get started.  (For more on compound interest, scroll down to the compound interest January post.)

If your budget allows, have your savings automatically deducted from your paycheck and pay yourself upfront just like you pay your bills.  If your monthly pay varies, set aside money for yourself after you pay your necessities. Depending on where you are in your financial journey, this may mean contributing towards a savings fund or towards an investment portfolio.  Contributing towards an emergency fund is a better first step than contributing towards an investment portfolio if you don’t already have incidental money set aside.  An emergency fund will be there for unexpected expenses and can prevent you from going into debt when emergency situations arise.  Once you have that fund in place, you’re ready to start a portfolio.

September 3, 2018


we hear that it’s important, but why and what does it mean? 

Simply, diversification is a risk management technique that mixes a wide variety of investments within a portfolio.  Let’s say you own 30 stocks within your stock portfolio and most of them are individual tech stocks.  You would be exposed to more risk of your entire portfolio taking a loss if the tech industry took a hit.  However, if you balanced out the tech stocks with stocks from different industries and other types of holdings, a hit to tech would be neutralized by the continued performance of the other holdings—this is separate from when the entire market takes a hit or a market correction occurs.

Diversifying is important because owning different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.  Diversifying is also important when looking across your entire investments portfolio—outside of just stocks.  For example, if you’re invested in real estate and the stock market and there’s a market downturn, you’d be covered by your stake in the real estate market.  If you are invested in real estate, but you also own equity in a business and the housing bubble bursts, you’d be covered by your equity in the business.

What are some of the things you can diversify in? As mentioned, you can have individual stocks, but there are also mutual funds, ETFs, bonds, commodities, real estate, private equity, IRAs, and more.  All options have different associated risks and the combination that is right for you will depend on your risk appetite.  As you continue to build your portfolio, remember to diversify and protect the overall performance of your portfolio from some negative performance.

July 29, 2018

Pay Me in Equity?

If you’re Beyoncé, then absolutely, but for the rest of us, is getting paid in equity smart? Probably not.

You can’t pay bills or sustain your lifestyle with equity. What you can do, hopefully, is build your net worth, but that’s dependent on the value of the equity you own going up over time and not down. “Having equity” just means you own a piece of something—you can have equity in a home, businesses, stock, etc. For example, if you have owned stock (equity) in Amazon for the past 5 years, the value of said equity has increased. Conversely, if you have owned Snapchat since it’s IPO, the value of your equity has gone down.

For the average earner, getting paid in equity for your 9-5 job, or primary source of income, probably would not be smart—you need that income in cash to sustain your lifestyle, pay bills, and so on.  However, let’s say you blog as your side hustle, you’ve built a respectable following, and you get paid to post ads.  Instead of being paid cash, you could ask to be paid via equity in the business.  This is an option because it would give you the opportunity to have ownership and gain new business acumen while not jeopardizing your financial stability.  Equity is a long-term play.  If your 9-5 job were to offer you sole payment in equity, usually via stock options, the shares would need to vest over a minimum amount of time before you actually had access to the rewards, and in that time, there is no guarantee that the value of the stocks would rise.  Additionally, if you were to leave the company before your stock options vested, you wouldn’t have access to the shares at all and would leave without that compensation.

Bottom line: if you need cash flow to sustain your lifestyle, getting paid only in equity isn’t for you right now, but keep building your wealth and one day it could be!

July 8, 2018

Four ways to build your wealth.

These are four quick hits that everyone can implement to help build your net worth and guide you along your personal finance journey.

1.  Increase your savings as your income increases.  For example, increase your retirement contribution by 1% each year, ideally around the same time you get your raise.  It’s a simple concept—as you make more, you should save and invest more! By doing so when you get a raise, the increase in contribution won’t feel as significant against your day-to-day financial needs.  Just a 1% increase per year can be the difference between becoming a millionaire or not.  Here’s a scenario from Money magazine on how this works:

“Say you’re 22, earning $40,000 a year, and saving 6% of your salary in an invested retirement account like a 401(k). If you stick with that same 6% savings rate year in and year out, you’d end up with $551,000 by the time you’re 67. HOWEVER, if you increased that 6% savings rate by just one percentage point every year, you’d end up with almost $1.4 million by the time you’re 67.”

2. Don’t delay your retirement savings. Time = compound interest—the eight wonder of the world, according to Warren Buffet.  When you start saving matters more than how much you save.  Investing in an account in which you can get compound interest can exponentially grow your wealth.  As a refresher, compound interest refers to interest that is calculated both on the principal investment as well as the accumulated interest of previous periods of deposits.  Because interest is accumulated on the principal and on subsequent deposits, this allows the sum to grow at a faster rate than it would with simple interest, which is calculated only on the principal amount.  So, the earlier you start, the more time your money has to grow!

3. Make a realistic budget.  Set a budget that you can stick to and that works for your household.  Budgets can be challenging, but they shouldn’t be unattainable.  If you’re constantly overbudget, consider reconfiguring your allocations or determining if you’re truly holding yourself accountable.  Another factor to consider are any dependents that affect your budget.  Make sure your household (if applicable) is on one accord about expectations around budgeting—open and honest communication is key to getting everyone on board.  As we like to say, start the conversation!

4. Avoid impulse buying.  Impulse buying gets the best of us and can ruin a good streak of financial discipline.  What’s worse—often times once you give in once, you’ll do it again!  Do your best to keep yourself out of tempting situations and implement new habits like making lists when going to the store and sticking to them.

Keep these four actions in mind as you go along your financial journey.  The goal is to build wealth, gain knowledge, and share that knowledge!  Consider talking these over with your financial accountability partner or your family—that’s the real beginning of generational wealth!

June 24, 2018

529 Savings Plan

Given paying for tuition can be as expensive as purchasing a home, it’s safe to say that education costs can be one of the most significant financial undertakings you can make.  Luckily, there is a tax-advantaged savings plan that can help—the 529 Savings Plan. 

The 529 Savings Plan is a specifically designed tax-advantaged investment vehicle, similar to an IRA, that encourages saving for higher education costs.  Often, parents will start a 529 Savings Plan once they have their first child, but you don’t actually have to wait! Not only can you open a 529 before your child is born, but you can open one for your own future higher ed costs or for a grandchild’s.  If you’re opening the account for a future child, then you would open the account in your name and when he or she is born, transfer the account to their name.  If you’d like to go above and beyond, know that is best to open the account 10 years prior to the child’s birth to take advantage of compound interest.  Your contributions go in after tax and then grow and can be withdrawn tax-free.  The amount that you can contribute to a 529 is regulated by state, but for many the limit exceeds $200,000. 

529 funds can be used for both undergraduate and post-graduate studies including tuition, room and board, and other pre-approved expenses.  If the funds are not used towards education, you will have to pay a 10% fee in addition to federal taxes owed on money withdrawn.

May 20, 2018

Investor Spotlight: Warren Buffett

Warren Buffett—a name familiar to many and to some, signifying a genius, billionaire investor and owner of Berkshire Hathaway.  From the outside looking in, it may seem as though his wealth and strategies are unattainable, but that’s not entirely true.  Buffett has often commented on his investment strategies and they’re not too hard to follow:

Warren Buffett is a value investor.  This means he looks for stocks that are undervalued by the market and overlooked by the majority of other investors.  However, Buffett is not concerned with whether or not the market will eventually begin to value said security or with short-term capital gains.  Instead, he seeks ownership in companies with potential for great earnings long-term.

"In the short term the market is a popularity contest; in the long term it is a weighing machine." -Warren Buffett

Some of the key metrics Buffett uses to determine whether or not a company is undervalued are return on investment, debt to equity ratio, profit margins, and age of the company.  Buffett typically only invests in companies that have existed for more than 10 years.  In addition, it is well known that Warren Buffett only invests in companies that he fully understands.  It is also well known that Buffett does not understand many of the technology companies around today.

Finally, Buffett uses these metrics to decide if a company’s intrinsic value is actually higher than its liquidation value—the company’s worth if it were sold today.  The intrinsic value, however, also includes brand value and intangible assets not listed on the balance sheet.  If a company’s intrinsic value is at least 25% more valuable than it’s current price, then Buffett views it as a sound investment. 

Buffett may make these valuations sound easy, but it’s his mastery of the method that has made him so successful for decades.

April 15, 2018

 Compound Interest & the Rule of 72 

When you start saving matters more than how much you save.  Investing in an account in which you can get compound interest can exponentially grow your wealth and even make you a millionaire

The word “interest” often has a negative connotation when we think of it in terms of debt, but what about when we think of it in terms of investing?  As Albert Einstein once said “compound interest is the eighth wonder of the world.” Compound interest refers to interest that is calculated both on the principal investment as well as the accumulated interest of previous periods of deposits.  Because interest is accumulated on the principal and on subsequent deposits, this allows the sum to grow at a faster rate than it would with simple interest, which is calculated only on the principal amount. 

Let’s also consider the “Rule of 72.” The "Rule of 72" is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest.  The premise is about every 7 years, thanks to compound interest, you can expect your initial investment to double.  For example, if I invest $1000 at 10% interest into my Roth IRA in 2018, and do not contribute any additional dollars, my account will double to $2000 in 2025.  You can calculate the Rule of 72 by dividing 72 by the annual rate of return meaning that $1000 I invested at 10% would take 7.2 years ((72/10) = 7.2) to turn into $2000*. 

*A 10% annual return and numbers used are hypothetical. Past performance is no guarantee of future results.

January 21, 2018


What do these market milestones mean? The Dow Jones Industrial Average is the oldest and most widely followed US stock market index.  It is a price-weighted index, meaning it is calculated by adding up the 30 companies’ stock prices and dividing them by the Dow Divisor.  This 20,000 to 25,000 market rally has mainly been carried by 5 Dow Components: Boeing, UnitedHealth Group, Caterpillar, 3M, and Home Depot.

How did we get here? The 24,000 milestone happened about a month ago and 20,000 was less than a year ago! Keep in mind that it took the Dow 14 years to grow from 10,000 to 15,000 and 3.5 years to go from 15,000 to 20,000. Regulatory and tax reform, low interest rates, and strong corporate earnings are just a few of the reasons why the markets are soaring.

January 4, 2018

Dow 25k

Investing Getting Started

After setting your financial goals, specifically regarding your net worth, you might wonder how you can began to increase it.  

Investing is a great way to build personal wealth and generational wealth.  Whether you have a lot or a little to invest, start looking into entering the stock market in order to capitalize on compound interest.  

There are apps, such as Acorns and Stash, that help you to invest your "spare change" and robo-adviser sites, like Betterment, that can help you get started.

January 1, 2018

This material is for your information.  The opinions expressed may differ from those with different investment philosophies. This material is for informational purposes only and does not constitute investment or tax advice and it should not be relied on as such.