21

“Whatever You Have, Spend Less”

“Annual Income, £20; annual expenditure, £19 19s 6d. Result: Happiness. Annual Income, £20; annual expenditure, £20 0s 6d. Result: Misery.”

—MR. MICAWBER IN CHARLES DICKENS’S DAVID COPPERFIELD

 

“Probably the most tangible benefit [of being a billionaire] is that I get very good tennis games.”

—GEORGE SOROS1

 

“Money, to some extent, sometimes lets you be in more interesting environments. But it can’t change how many people love you or how healthy you are.”

—WARREN BUFFETT2

 

BELIEVE IT OR NOT, you can usually tell whether children are going to be wealthy or not by the time they are three or four years old. If they take their pocket money and immediately blow it on candies—and the next day ask to borrow a dollar you know you’re unlikely to ever get back—let’s hope this behavior doesn’t last them a lifetime. Sadly, too often it does.

But if a child is frugal with his pocket money, always putting aside a chunk of it, you can be confident he has a good chance of achieving financial independence as an adult.

And a frugal kid who invests her pocket money in candies to sell to other kids at a profit might become another Warren Buffett.

Aside from inheriting, marrying, or stealing wealth, there’s only one way to accumulate investment capital: Live below your means. This is a behavior that both Warren Buffett and George Soros exhibited from an early age. Their achievement of wealth beyond most people’s wildest dreams has not changed those core values. They weren’t extravagant as children or teenagers; and they aren’t now. The leopard doesn’t change his spots.

For most of his life Soros has lived in modest accommodations, often almost indifferent to his surroundings. Once a Swiss art dealer loaned Soros a Paul Klee painting he could easily afford. “He loved it, but sent it back saying he could not separate the painting from the figure on its price tag.”3

When he married his second wife, Susan Weber, “he sent me out to look for apartments,” she said. “Every apartment I show him he turns down. It’s too expensive, he says, or it’s too big.”4

Some billionaires insist on traveling around in a chauffeur-driven limousine. Not Soros. He’d grab a taxi, ride a bus, take a tram, or simply walk from one part of town to another. It was never a matter of saving money, just getting there the most efficient way.

Reflecting on his own wealth, Soros once said: “A benefit of being successful was that I could afford the things I wanted, but I did not have extravagant tastes. I always lived on a scale that was more modest than my financial resources.”5

The Extremist of Omaha

Stories about Buffett’s frugality (some call it miserliness) are legion. One day Warren Buffett was riding the elevator up to his office on the fourteenth floor and there was a penny on the floor. None of the executives from construction conglomerate Peter Kiewit Sons, riding in the same elevator, took any notice.

Buffett leaned over, reached down and picked up the penny.

To the Kiewit executives, stunned that he would bother with a penny, the fellow who would one day be the richest person in the world quipped, “The beginning of the next billion.”6

Buffett is an extremist on the subject of money. And nowhere is his extremism more evident than when it comes to spending it.

Or, to be more accurate, not spending it.

The basis of his frugality is his future orientation. When he spends a dollar—or scoops a dime off the street—he’s not thinking of today’s value of that money. He is thinking about the value that money could become.

For Buffett thrift isn’t just a personal virtue but an integral aspect of his investment method. He admires managers like Tom Murphy and Dan Burke (of Capital Cities/ABC) who “attack costs as vigorously when profits are at record levels as when they are under pressure.”7 He was a fan of Rose Blumkin, whose motto was “Sell cheap and tell the truth,”8 long before he bought her business, the Nebraska Furniture Mart. She cut costs so ruthlessly that she drove her competitors out of business. Major national furniture chains simply avoid Omaha because they know they cannot compete.

Buffett loves managers who ensure their companies live below their means. While Buffett and Charlie Munger were accumulating stock in Wells Fargo, they found out that Carl Reichardt, the bank’s chairman, had told an executive who wanted to buy a Christmas tree for the office to buy it with his own money, not the bank’s.

“When we heard that, we bought more stock,”9 Munger told shareholders at the 1991 Berkshire annual meeting.

Frugality is a natural aspect of both Buffett’s and Soros’s characters. As their wealth increased, both indulged in minor extravagances. Minor compared to their wealth. Buffett bought an executive jet he named The Indefensible. Aside from his apartment in Manhattan, Soros owns a beach house on Long Island, a country home in upstate New York, and a house in London.

But wealth didn’t change their natural frugality. It’s easy to see how the consequence of living below your means is important when you’re starting out. It’s the only way you can accumulate capital to invest. What’s less obvious is how this mental habit remains crucial to your investment success even after your net worth has soared into the billions.

Very simply, without this attitude to money you won’t keep what you have earned. Spending money is simple—anyone can do it. Making money is not. That’s why living below your means is the attitude that underlies the foundation of the Master Investor’s success: preservation of capital.

By keeping what he has, and adding to it by living below his means, the Master Investor lets his money compound indefinitely. And compound interest plus time is the foundation of every great fortune.

Most people want to be rich so they can fly first class, live it up in the Ritz, feast on champagne and caviar, and go shopping at Tiffany’s without giving a second thought to their credit card bill.

The problem is that people who have this attitude to money don’t wait until they’re rich before they start indulging their fantasies, even if only on a small scale. As a result they never accumulate any capital, or even worse go into debt so they can live beyond their means … and remain poor or middle-class.

Wealth is really a state of mind. In the words of Charlie Munger: “I had a considerable passion to get rich. Not because I wanted Ferraris—I wanted the independence. I desperately wanted it.”10 If you share this attitude, once you have gained that hard-fought independence the last thing you’re going to do is jeopardize it by blowing all your money.

The alternative to living below your means is the debt-laden pattern of the middle class: If compound interest isn’t working for you, it’s working against you, bleeding your money away just as a spurting artery drains your life energy.