Many surveys have found that a large percentage of households would struggle to come up with $400 in the event of an emergency. The COVID-19 pandemic has turned this conceptual question into a very real one with potentially devastating human consequences. Financial literacy, and ultimately, financial independence are goals that everyone should aspire to. Beyond the knowledge gained, we believe that those who take the lessons of this book to heart will experience a sense of confidence and freedom in financial matters. The confidence to make good financial decisions. Freedom from the stress that comes from living paycheck to paycheck. Ultimately, the freedom to live the life you want to live and to help the people and causes that you care deeply about.
What better way to become financially literate than to use a framework inspired by perhaps the greatest financial mind that ever existed—Warren Buffett's? That's the concept and desired outcome of this book. No one reading this book will become as rich as Warren Buffett, but we do aim to teach you to become financially literate, with the backbone of the book being 100 “tips” or strategies that are largely quotes and anecdotes from Warren Buffett. We're two of his biggest fans and Berkshire Hathaway shareholders.
For decades Buffett met with groups of college students several Fridays each year for a two-plus hour Q&A session, followed by a lunch at a local Omaha restaurant. Gorat's Steakhouse and Piccolo Pete's Restaurant (now closed) were two of Buffett's favorite places to take the students. The students also received a management-guided tour of several of Berkshire's subsidiaries, such as Nebraska Furniture Mart, Borsheims, and the Oriental Trading Company. John, a Finance Professor and money manager, led four trips with Rutgers students to meet with Buffett at Berkshire's headquarters in Omaha, Nebraska. In case you're curious, Buffett did pay for the students’ lunch, and a root beer float, Buffett's favorite, was often a dessert. He often also generously posed for selfies and group photos and autographed books. It seemed like Buffett had as good a time on these visits as the students and faculty in attendance.
One thing that struck John about these meetings was Buffett's wisdom on non-financial-related topics, such as the importance of communication skills, having a group of friends that would inspire you, and the significance of helping others. So, although this book is primarily focused on financially related topics, the “life” part of the book contains many equally valuable lessons.
A confluence of events resulted in the creation of this book. Professors are required to do research, so John is always thinking about some type of research activity. He has also taught investment-related courses for roughly 20 years, with an emphasis on value investing, which is Buffett's specialty. Over the past few years, John was teaching his teenage son, Tyler, about financial-related topics in real time. For example, they opened several financial accounts specifically geared towards minors, such as a savings account, checking account, debit card, credit card, college savings plan, and brokerage account. Additionally, Tyler had completed enough coursework in financial-related topics that he was able to make meaningful contributions to this book. Specifically, he has completed coursework in Financial Literacy, AP Economics, AP Statistics, and the Introduction to Business, Finance, and Economics program for high school students at Columbia University. There are a lot of books on Buffett and even more on the topic of financial literacy. But we believe this is the only book that effectively combines the two topics.
Part of Buffett's charm is his plain-spoken language, pop culture references, and wonderful sense of humor. You will see many examples of these characteristics in our book. We tried to incorporate those elements into our writing as well. To illustrate this point, here's one example from Chapter 6. “You might find it amazing that Berkshire Hathaway has almost 400,000 employees, but there are only 25 people in Berkshire's corporate headquarters in Omaha. How can he manage so many people with a staff slimmer than Snoop Dogg's waistline?” We want this book to be understandable to all readers, so the emphasis of any conceptual topic is on intuition. Any (non-trivial) formulas are relegated to an endnote or appendix.
Financial literacy is a vast topic, so we considered a number of approaches to deciding on the content for this book. There are some basic building blocks for being financially literate, such as having the right mindset, living within your means, starting early, paying off credit cards, and investing in stocks for the long term. All of these topics receive detailed coverage, peppered with Buffett quotes to drive these points home.
Chapter 1 begins by talking about the incredible life of Warren Buffett. Many people unfamiliar with his story will be surprised at the financial success Buffett experienced at a very young age. We then move on in Chapter 2 to discussing some of the fundamentals of investing, such as the “miracle” of compound interest and how supply and demand interact to determine price. Chapter 3 takes some baby steps into financial products offered by banks and other firms. Things such as a bank account, checking account, and credit cards. It also covers newer apps, such as Venmo and Zelle, as well as your credit score.
Chapters 4 through 6 cover the bond market and stock market, the two most important financial markets for most people. Stocks are clearly at the heart of how Buffett generated his enormous wealth, so they are given detailed coverage. We discuss what a stock is, how it trades, and how it is valued by investors, as well as the features Buffett looks at when he buys part of a company, or a firm in its entirety. Chapter 7 discusses the fundamentals of accounting, which is the language of business. We'll try to make it painless by looking the essence of the financial statements of Apple and drum roll…Berkshire Hathaway.
Very few people put all their assets in a single investment. Therefore, it is crucial to discuss risk and how to create a portfolio of investments. We'll discuss two main approaches espoused by Buffett in Chapter 8. First is an index fund, an investment product that aims to own a broad cross section of investments. The second, which we refer to “expert mode,” is concentrating your assets in less than 10 firms that you thoroughly understand, or what Buffett refers to as in “your circle of competence.”
Part of being financially literate is knowing what is going on in the world of business. So Chapters 9 and 10 discuss the “who's who” of industry, both with respect to people and firms. Regardless of how much money you make, you won't build any wealth if you can't live within your means. We've all read articles about famous celebrities or athletes who were once multimillionaires but eventually went bust. Therefore, Chapter 10 is focused on being thrifty like Buffett. It basically covers ways to save money. Saving money in some respects is more important that making money, since you pay taxes on the latter approach and not the former. The two biggest purchases for most individuals are their homes or cars. Given the importance of these big-ticket purchases, we decided to devote a whole chapter to it, Chapter 12.
Buffett said taking a Dale Carnegie course in communications and dealing with people literally changed his life for the better. Chapter 13 discusses some of the key concepts espoused by Carnegie, as well as a newer topic developed by author Dan Goleman, emotional intelligence. Another big-ticket item for young people, or their parents, is college. It is more of an investment than a purchase; hence, we give the topic its own chapter. Chapter 14 discusses the ins and outs of college, especially with respect to financing it. Buffett has had an enormously successful business career, even separate from his legendary investment prowess. Chapter 15 focuses on career-related issues, such as maxing out your retirement plans and filling out the inevitable paperwork that comes with most jobs. We end the book with Buffett's tips for philanthropy. In case you don't know, Buffett is giving virtually all of his wealth away, proving that he did it for the love of the game, rather than trying to build the biggest pile of money.
We hope you read this book more than once. Even so, it's easy to forget some of the terms or concepts. To aid your life-long learning process, we've included a detailed glossary and summarize each chapter with a handy list of Buffett's tips. If you find this book helpful, don't thank us. Rather, thank Buffett by paying it forward and doing something kind for a person in need. We know he would approve!