The views presented here do not necessarily represent those of Advisor Perspectives.
The 94-year-old “Oracle of Omaha” announced at his last shareholder’s meeting that he’s stepping down as CEO of Berkshire Hathaway at the end of this year. Though I never met him, he has taught me a lot about money — and life.
Many consider Buffett the world’s greatest investor. Berkshire shares gained a whopping 5,502,284 percent between 1965 and the end of 2024, according to the company’s most recent annual report. By comparison, the total return of the broad S&P 500 rose 39,054 percent during that period with dividends. That translates to an average annual return of 19.9 percent versus only 10.4 percent for the S&P 500. Impressive, to say the least.
Here are some brilliantly simple lessons for us all that I learned from Warren Buffett:
1. The most important skill for an investor is temperament, not IQ.
Though Buffett technically said that about investment managers, I think it applies to investors as well, and for good reason. While I can’t predict markets, I can predict the behavior of most investors will be predictably irrational. People tend to buy high and sell low. The stock market goes up, bolstering investor confidence, and we confidently buy high. But when markets plunge, that confidence goes out the window and we frame our decision to sell as logic rather than panic.
Investment research company Morningstar shows that the average investor loses 15% of their returns on funds by poor timing. As Buffett put it, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” The stock market lost 35% in the 33 days ending on March 23, 2020 as COVID hit. My portfolio took quite a painful beating, and I felt every bit of it like my stomach had gone a few rounds in a cage match. Yet buying more stocks in March of that year to get back to my target allocation to stocks was even more painful. It didn’t take a high IQ but the right temperament to stay the course and stick to the plan.
2. Embrace index funds.
It’s ironic that the world’s most successful investor recommends others invest in index funds. I agree wholeheartedly with this strategy because I’m no Warren Buffett, and neither are those experts we pay to beat the market. Sure, there are some that have outstanding 10-year records, but there are not so many as would be expected from sheer randomness. Translation: It takes at least 25 years to differentiate a great manager from a lucky one.
Buffett advises people not to hire experts to try to beat the market. He wrote in the 2016 Berkshire Hathaway annual report, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
I agree: I’ve been an indexer since the late ’80s, and have written about their virtues in hundreds of articles over the past few decades.
3. Learn from and even celebrate mistakes.
In 1983, Warren Buffett bought 80% of Nebraska Furniture Mart from its 89-year-old founder, Rose Blumkin. Years later, Blumkin opened a competing store right across the street. Buffett bought that store out as well, this time including a noncompete agreement. Buffett talks about the lesson he learned from this mistake — primarily that he will never make that mistake again.
I’ve learned from and celebrate my mistakes as well. For instance, I celebrate my $1 million mistake buying gold in 1980 rather than investing in capitalism with a S&P 500 index fund. And I recently reviewed and wrote about the worst articles I’ve written over a 20-year career covering investing. In doing so, I came to terms with the fact that I’ve made some predictions that turned out to be dead wrong.
4. Trading can be hazardous to your wealth.
“My favorite holding period is forever,” Buffett wrote in his 1988 annual report, referring to owning outstanding businesses with outstanding managements. While I don’t generally buy individual companies (outside of a small gambling account), buying thousands of companies through index funds is buying capitalism, and I’ll own them for a long period of time.
As previously mentioned, trading generally leads us to underperform the market, not to mention paying taxes. I’ll do minimal trading to rebalance to a target stock allocation. My preferred holding period is also forever.
5. It’s more than OK to charge less than you are worth.
At a time when pay packages for CEOs are in the tens of millions of dollars, Buffett’s salary stayed at a modest $100,000 for 35 years. I suspect that if he actually needed the money for his family, he would have given himself a raise. Or better yet, rather than creating his investment firm in a publicly held company with no fee, he could have done so in a mutual or hedge fund charging high fees.
I’ve twice been a financial officer of billion-dollar companies as well as a management consultant for many more. I’m embarrassed to confess that much of my emotional net worth was tied to my financial net worth. Though I make far less today writing columns and doing hourly consulting, it is far more satisfying. I’m now quite OK with it because I have enough. Dying richer is not a goal I set for my clients or myself.
6. Stick with what you know.
Warren Buffett won’t invest in businesses he doesn’t understand. This doesn’t mean he won’t learn about a business, but unlike many investors, he will learn before he makes an investment.
I may know little about most of the companies in total stock index funds, but I know how a simple cap-weighted index fund works. I explore other financial products and learn. Most don’t pan out.
I don’t invest in commodity funds because, except for precious metals, they don’t own the commodities. They own futures, where, in the aggregate, not a penny has ever been made before costs. I explored interval funds and learned most have a right to gate redemptions. I explored direct indexing and decided against it because the tax-loss harvesting quickly runs dry while the fees and complexities continue.
Yet some do check out. I once thought a TIPS ladder giving a 4.7% real safe withdrawal rate for 30 years was too good to be true. Sometimes CDs have rates that are better than bonds, as FDIC and NCUA insurance levels are meaningful to individual investors but not to institutions with billions of dollars in cash. Sometimes private deals pass my three criteria that the vast majority fail.
7. Capitalism and ethics can (and should) coexist.
Warren Buffett speaks his mind even when his views run counter to his interests. One example is arguing for a more progressive tax code, noting that his tax rate is far less than his secretary’s. He certainly didn’t win friends when he called our healthcare financing system a “tapeworm” on our economy and compared our per-capita expenditures and life expectancies to other countries. He won’t win friends in the current administration by saying tariffs and protectionism should not be a weapon. Irrespective of how you feel about these and other issues Buffett has spoken out about, he has nothing to gain and everything to lose, especially if more progressive tax codes are enacted on the wealthy.
Buffett’s ethical courage taught me that doing the right thing is more important than doing what’s best for your own interests. He taught me that it’s OK to be very critical of my own financial services industry, which I’ve been doing for a couple decades, mostly without success in causing change. Still, there is some satisfaction from trying.
8. Life isn’t about luxuries.
Buffett lives in the same modest house in Omaha he bought in 1958. He’s also said, “I don’t like a $100 meal as well as [I like] a hamburger from McDonald’s. That’s the way I’m put together. I don’t equate the amount I spend with the enjoyment I’m going to get from something.”
OK, maybe I was also put together that way, so Buffett’s philosophy only reinforced this behavior. I recently bought a nicer car (still below the average car price), though I’ve purchased modest cars most of my life, which has saved me a bundle. I’ve never minded having the worst car in the neighborhood. And despite being able to afford it, I can’t bring myself to pay to fly first class or stay in ultra-luxury hotels. Getting bargains on purchases is a game I enjoy far more than solving crossword puzzles.
9. Give back.
Buffett has given more than $58 billion since 2006 to charitable causes. He pledged most of his fortune to the Bill & Melinda Gates Foundation, which has already received more than $43 billion. Buffett has also donated 56.6% of his Berkshire shares. I suspect that brings him more happiness than the trappings of wealth that he could easily afford.
I might give myself a C- in giving back either financially or through donating my time to charitable causes. That’s an improvement from the D or worse I would have given myself a few years ago. I’ve learned this lesson, and am still working to apply it.
10. Do something you would be doing if you didn’t need the money.
Why did Warren Buffett wait so long to announce his retirement as CEO? He obviously didn’t need the money. I suspect it was meaningful work that he enjoyed. And while he will soon retire, I’ll bet heavily that he won’t stop working and we will continue to hear the wisdom of Warren Buffett.
I’m still working because I think it’s meaningful and I enjoy it. You may also be in that situation or know many people who are. Life is too short to spend decades doing something you don’t like.
Conclusion
As I mentioned, despite never having met or had any contact with Warren Buffett, I’ve learned a lot from him. It is striking that most of these are the same lessons I also learned from someone I was fortunate to meet many times — the late Vanguard founder, John C. Bogle. It’s not surprising that their values align closely, because they both possess(ed) character and put shareholders first.
In fact, Warren Buffett once proclaimed that Jack Bogle “has probably done more for the American investor than any man in the country.” Buffett paid a tribute to Bogle, introduced him at an annual shareholders’ meeting, and endorsed several of his books.
Our relationship with money is quite complex, and I’ve still got a lot to improve upon. Despite Buffett stepping back as CEO, I suspect the Oracle of Omaha will still be teaching all of us about investing, money, and life; hopefully, for many years to come.
Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisory firm. He has been working in the investment world of corporate finance for over 25 years. Allan has served as corporate finance officer of two multibillion-dollar companies and has consulted with many others while at McKinsey & Company.
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The views presented here do not necessarily represent those of Advisor Perspectives.