What would Buffett Do? A question so many market followers, investment enthusiasts, Wall street admirers and entrepreneurs ask themselves — especially around this time of year when Warren Buffett publishes his annual letter to the shareholders of Berkshire Hathaway. The highly-followed rhetoric from Mr. Buffett, however, is likely overlooked and disregarded by a large majority of us. Who is “us”, you may ask? Millennials. Or really anyone belonging to a younger generation. Sure, we know Buffett. And he’s great or whatever, but his business is not as cool as Zuckerberg's and his investing is way less exciting than cryptocurrency. So why care about his opinion?
As a self-proclaimed Millennial Wealth Expert (whatever that means), my general advice for the newer, younger investor is not to take too much investment guidance from anyone who enjoyed the better parts of life before AOL dial-up. That is to say, although they may be wise and experienced, some older generations simply cannot relate to the world we live in today. The financial landscape is dynamically evolving, particularly in new areas of technology and innovation. And with that comes a new paradigm shift for how we Millennials invest and manage our money. Old rules no longer apply to us. So why take new people, new ideas, new money and try to force them into the primitive ways of Wall Street?
Well. After reading Buffett's letter year, I found a glitch in the logic. Some advice is truly timeless. Warren‘s sound investment and business practices can actually complement the new innovative ways of Millennials. If we could master some of his principles within the context of our own worlds, we could be much better builders and sustainers of wealth.
Here's four great lessons that Millennials can take away from Buffett's 2018 annual letter to his shareholders:
#1 The US Stock Market is your best friend.
Buffett’s letter to shareholders this year shows a high regard for US stocks as a foundation for sound investment returns. Toward the end of his note, it seems like he's writing a love letter dedicated to “the American Tailwind” — which is sweet, poetic prose around his 77-year financially-rewarding relationship with American businesses. It’s a bit wacky, but he's undoubtedly proclaiming that he is long the US stock market. To prove it, Buffett and team bought $43 billion dollars of stocks in 2018 and will continue to do so this year. And by Warren’s own admission,“many stocks have offered far more for our money than we could obtain by purchasing businesses in their entirety." Ummm, let me breakdown the significance of this: The world’s most admired investing legend — who’s successful investment strategy is to take his gazillions of dollars and purchase whole companies — is instead, simply buying stocks in the stock market. Literally, just like you and I can do on our RobinHood app. Whoa. This essentially puts us and Warren Buffett on the same playing field! (Ok, maybe not the exact same playing field... he bought a few billions worth*)
So is he making a call on whether the stock market will go up or down in the near future, this year or the next? Nope, not really, that’s not the game he plays. He just knows the value of investing in US stocks long term, especially when all else fails.
Millennials should definitely take note, Why?....
Because Millennials aren’t really investing in the stock market. In fact,
Only 23% of Millennials feel the stock market is the best place put money they won't need for 10 years more.**
Unfortunately, many of us are still very sensitive to the hurt and negative memories left behind from the 2008 financial crisis, so we’re fearful of the stock market. (And ironically, because of how behavioral biases work, we concentrate on the losses of 2008, but completely ignore the exceptional +200% market rally that has taken place over the last 10 years since the big dip). Because we are not heavy participants in the stock market, we are missing out significantly on these coins. Millennials also tend to want to be involved more in the “fad investing”, as I like to call it, surfacing all around us. Mostly because it's cool, or popular in the startup worlds, or trending on Twitter. But many of those investment are highly volatile and the valuations are too high, improbable and unsustainable (i.e. see my post on Bitcoin). Millennials, please know this: even among this buzzing age of innovation and growth, sound investing will always be in style. So take a note from Buffett and trust that you will forever have a friend you can depend on in the American stock market.
#2 Buffett loves ETFs, and so should you.
He generically refers to them as “low-cost index funds”, but we Millennials likely relate more to them as ETFs (exchange-traded funds): the cheapest way there is to invest in an index (or diverse portfolio) of stocks. Buffett calculates, that at 11 years old, if his first investment of $115 just sat in a no-fee S&P 500 Index fund, it would be worth over $606,000 today. That’s 5287% return, from essentially doing nothing.
What he’s illustrating, is that you don't need sophisticated hedge fund models or professional investment "experts" to make really good money from investing. And you for sure, don't need a Bitcoin. All you essentially need is time and an SPY ETF. For years Buffett has been extremely vocal about how bullish he is on passive index fund investing — and that professional investment managers are a waste of money, because even at a modest 1% fee, you lose so much value over time. He even shades his own Berkshire Hathaway professional stock-pickers occasionally, because they don't beat the market. And if you don’t know by now, the well-known Buffett challenge has proven that your average Main Street “know-nothing about money, all I have is a checking and savings” Joe Schmoe can outperform hedge fund investments over the long run.
Millennials, lean in closely. Here's Why you should care...
THIS. IS. A. GAME. CHANGER. We Millennials have it so easy, and most of us don't even know it! The access that has been afforded to us — to have super cheap (basically free), easy and convenient ways to invest successfully, at the tip of our fingers (literally, from an app on our phone) — is unheard of. Previous generations had to go through layers of bankers and brokers and professionals to get this type of VIP access. We don’t. This is #MillennialPrivilege. Get into it!
#3 When it comes to Debt : Just Say "Nope"
Aside from investment insights, many are drawn to Buffett’s annual letter for advice on general economics and life topics. With that being said, I would strongly suggest that many Millennials take a page out of Berkshire Hathaway's playbook when he says: “We used Debt sparingly.” When it comes to using debt, Warren essentially says, I'm good luv, enjoy. In fact, he refers to debt as a "Russian roulette equation – usually win, usually die"— and that it can become "financially fatal." Harsh, yes. But somewhat true. For example, the 2007 housing crisis actually proved this. Having a home mortgage debt is usually no big deal and totally acceptable. But when home values started dissipating in 2007, having a mortgage on a seemingly worthless asset was, in fact, financially fatal for many people. But without using such an extreme example, the general ability to “earn profits without employing excessive levels of debt” makes companies and people more valuable. I mean, relate this to yourself. How much more monetary value could we have if we earned (college degrees) and had (fancy things) without using excessive levels of student loan and credit card debt?
So here’s the real issue...
We are doing the most when it comes to debt.
62% of Millennials have more in Debt than in Savings.
Doing. The. Most. And I'm not just talking about the egregious student loan crisis which makes up only 16% of our debt. I'm talking about the high-interest accruing, 25% of the Millennial debt obligation coming from regular credit cards — essentially just from us spending more than we can afford to. As with most things in life, debt has compounding effects. For Millennials in particular, it has caused 34% of us to delay buying a home, 31% to delay saving for retirement, 16% to delay getting married and 14% delay having children*
We need to be smarter about debt. And at all costs, stay away from the inefficient kind (credit card debt) which is likely the most fatal. A wise man once said “Rational people don’t risk what they have and need for what they don’t have and don’t need". That wise man was Warren Buffett.
#4 Cash is king.
Of course we all know this. But to hear it from Mr. Buffett, the best way to be the king of cash, is to master “retained earnings.” Retained Earnings is a fancy accounting term (which you don’t care about) that Buffy loves to throw around for his businesses — but in real life, it’s just another way of saying: Keep your cash, save your money. This wealth lifestyle tip dripping all over his shareholder’s letter this year, is a great one to put into practice. To briefly humble all of us, let’s just look at the facts: Berkshire Hathaway has $112 Billion in cash. Literally, just sitting there. It almost seems preposterous. There are so many ways to spend this money, or distribute it to shareholders, but they don't. Because to remain a “financial fortress [you never want to] risk getting caught short of cash”. To rephrase Buffett's words: Stay Ready, so you don’t have to Get Ready.
This is a great practice for Millennials to master. I mean, in these days when you can make money from Instagram and call yourself a "brand," let’s keep that same energy when it comes to our personal finances. You are a business. And retained earnings is basically the ability to keep the money you earn, because you don't spend it frivolously or have significant debt obligation to repay (point #3) . This gives you a stronger financial footing and better flexibility in the future. And Millennials love flexibility!
So here’s the great news:
This is one thing that Millennials seem to get right. Yayyy! We are more the cash conservative types, and we save way more that prior generations. About 81% of Millennials are saving in some capacity. And that's definitely a good thing.
At the end of the day...
Buffett’s wisdom and experience has somehow been able to transcend the decades and speak directly to a new generation of Millennial investors.
One of the biggest attributions to Buffett’s longevity of success is largely due to the longevity itself. This is called time value. With almost eight decades of an investment horizon, you absolutely will get it right! As millennials, we are still young (some of us), so it’s pivotal that we invest. And believe me, you will be rewarded with time.
We have the advantage of transparency, access and information. All at our fingertips. Our millennial privilege allows us to “Do Buffett“ easier, faster and cheaper than Buffett does Buffett. So let’s not ignore the lessons we can take from Mr. Warren, and let’s be more inclined to ask ourselves #WWBD?
* t $43 billion of marketable equities last year, while selling only $19 billion