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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 Profes- sional 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 v
Acknowledgements vii
Chapter 1: Who Is Warren Buffett? 1
Introduction 1
Buffett the Teen 1
Who Are We to Write this Book? 2
What Is Financial Literacy and Why Does It Matter? 3
Some Fundamental Buffett “Tips” 3
Buffett’s Work Ethic 5
Buffett Has Spent a Lifetime Learning 6
Why Is Buffett Happy? 8
Improve Your Communication Skills and See Your Lifetime Earnings Increase 50% 8
Acting with Integrity is the Right Thing to Do and Good for Business 9
Buy Low, Sell High 10
Buffett Doesn’t Succumb to Peer Pressure: The Inner Scorecard 11
Buffett’s Fallback Career - Comedian 12
Buffett’s Lasting Legacy: Philanthropy 13
Buffett’s Tips from Chapter 1 14
Chapter 1 References 15
Chapter 2: Investment Fundamentals According to Buffett 18
Introduction 18
The “Miracle of Compound Interest” Explained 18
Tradeoffs: A Fundamental Principle of Life 20
The Saint Petersburg Paradox: A Lesson on Risk and Return 21
Risk and Return: The Evidence 22
Diversification: One of the Few Free Lunches in Life 24
Supply and Demand Determine Price 25
Summary on Financial Fundamentals 26
Buffett’s Tips from Chapter 2 27
Chapter 2 References 28
Chapter 3: Bank Accounts and Credit Cards 29
Introduction 29
Insured Bank Deposits 29
Savings Accounts and Certificates of Deposit (CD) 30
Checking Accounts and Electronic Bill Payment 31
Parts of a Check 32
Balancing a Checkbook 33
Debit Cards and Automated Teller Machines (ATM) 34
Credit Cards and Charge Cards 35
Apps to Send Money: PayPal, Venmo, Zelle, Apple Pay, Android Pay, etc. 37
Your Credit Score: A Report Card of Your Financial Responsibility 38
Personal Bankruptcy: Try to Avoid at all Costs 40
A Word on Bitcoin from Buffett 40
Buffett’s Tips from Chapter 3 42
Chapter 3 References 43
Chapter 4: Bonds and Inflation 44
Introduction 44
U.S. Savings Bonds 44
Other U.S. Treasury Fixed Income Securities 45
Income and the Consumer Price Index (CPI) 47
Bond Ratings and Corporate Bankruptcy 48
Corporate Bonds, Municipal Bonds, and Bowie Bonds 50
Bowie Bonds and Other Asset Backed Securities 50
The Federal Reserve: The Central Bank of the United States 51
What Determines Interest Rates? 53
Intuition on Estimating the Price of a Bond 54
So, Are Bonds Good Investments? 55
A Note on Negative Bond Yields 56
Buffett’s Tips from Chapter 4 56
Appendix: Bond Valuation 57
Chapter 4 References 58
Chapter 5: Stock Market Fundamentals 59
Introduction 59
Initial Public Offerings (IPOs): The Birth of a Stock 59
Investment Banks and Investment Bankers 59
The Main Event: The Stock Begins Trading on the Stock Exchange 60
The Stock Exchange 61
A Sidebar on Stock and Mutual Fund Symbols 63
Dividends 64
Large Cap vs. Small Cap 66
Growth vs. Value 68
Domestic vs. International 69
An Index Fund: A Great “Set It and Forget It” Long Run Investment 70
Beating the Market and the Efficient Market Hypothesis 71
Meet Mr. Market, the Manic-Depressive Stock Market 72
Buffett’s Tips from Chapter 5 73
Appendix: Selling Short (or the “don’t try this at home” area of investing) 74
Chapter 5 References 76
Chapter 6: Buffett’s Approach to Stocks 77
Introduction 77
Estimating the Value of a Stock 77
Getting a Price Target with the Discounted Cash Flow Model 77
Getting a Price Target with the Wall Street P/E Model 79
Buffett’s Approach to Stocks 80
Getting into the Buffett Mindset of Investing 81
Stay Within Your Circle of Competence 82
The Importance of Being Patient 82
Good vs. Bad Companies and the Passage of Time 83
How Buffett Thinks About Change in an Industry 84
Types of Businesses Buffett Likes 84
A Moat Around a Business is a Recipe for Success 84
Demonstrated Consistent Earnings Power 85
Look for Companies with Good Management 85
But Good Management Can’t Help Sinking Industries 85
Buy Companies That Have the Power to Overcome Inflation 86
Focus on Firms with Favorable Long-Term Prospects 87
When to Sell 88
Summarizing Buffett’s Approach 89
Buffett’s Tips from Chapter 6 90
Chapter 6 References 91
Chapter 7: Accounting Fundamentals 93
Introduction 93
The Income Statement: A Company’s Report Card for One Period 94
Apple’s Income Statement 94
The Balance Sheet: A Picture of the Company’s Report Card Since Inception 98
Current Assets 99
Long-Term Assets 100
Liabilities 101
Current Liabilities 102
Long-Term Liabilities 103
Stockholders’ Equity 103
A Quick Note on the Statement of Cash Flows 105
Summary 105
Buffett’s Tips from Chapter 7 105
Chapter 7 References 106
Chapter 8: Buffett’s Approach to Portfolio and Risk Management 107
Introduction 107
The Key to Selecting a Well Diversified Portfolio: Correlation 107
A (Theoretical) Portfolio with No Risk 108
Selecting an Optimal Diversified Portfolio: The “Business School” Approach 109
Buffett’s First Approach to Portfolio Selection: Index Funds 111
Buffett’s Second Approach to Portfolio Selection: Expert Mode 111
A Compromise Portfolio Solution 112
Home Many Stocks Make a Diversified Portfolio? 113
The Business School Approach to Risk 114
Buffett’s Critique of the Business School Approach to Risk 116
Buffett’s Approach to Risk 116
Buffett on Gold 117
Summarizing Buffett’s Views on Risk 118
Buffett’s Tips from Chapter 8 119
Endnote on CAPM 119
Chapter 8 References 120
Chapter 9: Business 101: Companies 122
Introduction 122
The Dow Jones Industrial Average: The Oldest U.S. Stock Market Index 122
How The Dow is Calculated 123
An Explanation of Stock Splits 124
Different Share Classes and Buffett on Stock Splits 125
Current Stocks in the Dow Jones Industrial Average 126
Materials Stocks in The Dow 126
Consumer and Business Services Stocks in The Dow 127
Consumer Goods Stocks in The Dow 128
Financial Stocks in the Dow 130
Healthcare Stocks in the Dow 132
Industrial Stocks in the Dow 133
Technology Stocks in the Dow 134
Telecommunications Services Stocks in the Dow 135
Some Blue-Chip U.S. Stocks That Aren’t in the Dow 135
The FANG Stocks – They Don’t Bite 136
China’s Emerging Titans 137
Some International Energy Titans 137
Some Global Consumer Titans 138
Some Global Financial Services Firms 138
Buffett’s Tips from Chapter 9 138
Chapter 9 References 139
Chapter 10: Business 101: People 142
Introduction 142
Past Business Leaders 142
Present Business Leaders 147
Buffett’s Tips from Chapter 10 154
Chapter 10 References 155
Chapter 11: Being Thrifty Like Buffett: Ways to Save Money 158
Introduction 158
Your Library: Free Books, Magazines, Newspapers, Music, Movies, and More 158
Free Educational Courses: Khan Academy, Coursera, edX 160
Websites for Free Stuff 160
Free Activities 161
Amazon.com: The World’s Biggest Store 162
Comparison Shopper Tools: Your New Best Friend 163
Barter: Turning A Cell Phone into a Porsche 164
Eat A Low-Cost Meal, Periodically 165
Shop Private Label and Generic Items 165
Clothes: Outlet Stores, Vintage Items, and Buying Off-Season 166
Buying Gasoline 168
Coupons, Double-Couponing, Triple-Couponing, and Groupon 168
Rewards Programs 169
Negotiating with Cell Phone, Cable, and Other Service Providers 170
Yard Sales, Flea Markets, and More: Turning Trash into Treasure 171
Do-It Yourself 172
Donate Things to Charity 172
Avoid Shooting Yourself in the Foot with Bad Habits 172
Tying It All Together in A Budget 173
Buffett’s Tips from Chapter 11 174
Appendix: Sample Budget 175
Chapter 11 References 176
Chapter 12: Buffett’s Views on Cars and Homes 178
Introduction 178
Do You Need a Car? 178
New Cars vs. Used Cars 179
Buying vs. Leasing a Car 180
The Best Time to Buy or Lease a Car 182
Home Basics 183
Finding a Home 184
Bidding for a Home 184
Paying for a Home: The Down Payment 185
Paying for a Home: The Mortgage 186
A “House Hack”: Getting Someone to Pay (Most of) Your Mortgage 187
Looking Under the Hood of a Mortgage 188
Buffett’s Tips for Chapter 12 191
Chapter 12 References 178
Chapter 13: Buffett on Dale Carnegie, Communication Skills, and Emotional Intelligence 194
Buffett Learns Life Changing Skills in a Dale Carnegie Course 194
CliffsNotes Version on Dale Carnegie and How to Win Friends and Influence People 195
Things How to Win Friends and Influence People Will Do for You 196
Techniques in Handling People According to How to Win Friends and Influence People 196
Six Ways to Make People Like You According to How to Win Friends and Influence People 199
How to Win People to Your Way of Thinking, According to How to Win Friends and Influence People 200
What Is Emotional Intelligence (EQ)? 202
Emotional Intelligence (EQ): Some Details 203
Have a Great Posse 206
Buffett’s Tips for Chapter 13 208
Chapter 13 References 209
Chapter 14: Buffett’s Tips for College 212
Introduction 212
College: The Basics 212
Getting into a College 213
Graduate School: Optional for Some Jobs, Mandatory for Others 215
Paying for College: Scholarships and Grants 216
Paying for College: The 3 Year Plan for Super Achievers 217
Paying for College: 529 Plans 217
Paying for College: Student Loans 217
Paying for College: On and Off Campus Jobs 219
Your Resume: A Snapshot of Your Qualifications for a Job 220
Putting Together Your Resume 220
The Objective Section 220
The Education Section 221
The Work Experience Section 222
The Skills Section 223
The Activities & Interests Section 223
Cover Letter 224
Buffett’s Tips from Chapter 14 224
Appendix: Sample Resume 225
Appendix: Same Cover Letter 226
Chapter 14 References 227
Chapter 15: Buffett’s Tips for Careers 228
Introduction 228
LinkedIn Profile: Your Online Profile 228
Finding an Internship or Job 229
The Job Interviews(s): Preparation 230
The Job Interviews(s): Acing Your Interviews 232
The Job Interview(s): Compensation or Show Me the Money! 234
Succeeding on the Job 235
Financial Paperwork After Getting a Job 237
Forms W-2 and W-4 237
Form 1040: The Annual Tax Form and “The Buffett Rule” 238
Retirement Plans 239
Becoming a 401k or IRA Millionaire 240
Buffett’s Tips from Chapter 15 241
Appendix: Health Benefits Information 242
Appendix: Form W-2 245
Appendix: Form W-4 246
Appendix: Form 1040 247
Chapter 15 References 248
Chapter 16: Buffett’s Tips for Philanthropy 250
Buffett’s Huge Gift and The Giving Pledge 250
Getting Involved in Philanthropic and Charitable Activities 252
Measuring Performance 253
Market Based Economies Are Good… Unless You Wind Up as Roadkill 254
It’s Not All About the Benjamins 256
The Loss of Reputation Huts More Than the Loss of Money 257
Inheritance Matters 259
Buffett’s Definition of Success 259
Buffett’s Tips from Chapter 16 260
Appendix: Charitable Lunch Auctions for Warren Buffett Benefiting Glide Foundation 261
Chapter 16 References 262
Appendix: Glossary of Financial Terms in Plain English 263
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