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8 Money Secrets From Warren Buffett

1. Rich Is A State Of Mind

"I always knew I was going to be rich. I don’t think I ever doubted it for a minute." - Warren Buffett

The difference between being poor and being rich is really just a state of mind. Poor people think thoughts of poverty and lack, rich people think thoughts of abundance and prosperity. Your beliefs are going to determine the way you perceive wealth, the decisions you make and the way you act towards it.

2. Success Is More Than About Your Bank Balance

When asked by CNBC what is the secret to success, Buffett replied "If people get to my age and they have the people love them that they want to have love them, they’re successful. It doesn’t make any difference if they’ve got a thousand dollars in the bank or a billion dollars in the bank… Success is really doing what you love and doing it well. It’s as simple as that. I’ve never met anyone doing that who doesn’t feel like a success. And I’ve met plenty of people who have not achieved that and whose lives are miserable."

3. Spend Less Than You Earn

"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." -Warren Buffett

It seems like common sense advice and you’ve no doubt heard financial experts preaching about it for years. You can’t possibly get ahead financially if you’re spending more than your paycheck. Buffett is famous for living a simple and frugal lifestyle. He is the only billionaire I know that still lives in the same house he bought back in 1958 for $31,500. He drove a 2001 Lincoln Town Car for years which he bought second hand. Buffett has a net worth in excess of $52 billion and yet lives off an annual salary of $100,000. The relative percentage of his spending based on his overall net worth is minuscule.

4. Avoid Consumer Debt

The sooner we realize that consumerism is a social plague that has been propagated by billion dollar marketing machines to keep you shackled to your job, the sooner we can stop spending money on useless stuff. It is a fool’s game to spend today so that you can work tomorrow to pay it off. It is a losing proposition because one day your working days are going to be over but the debt is still going to be hanging over your head. Clever marketing has convinced our society that to be happy you have to have more, be more and do more. Buffett abhors consumer debt instead choosing to use debt wisely by leveraging it in investments. 

5. You Are Who You Associate With

"It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction." -Warren Buffett

If you want to succeed financially you need to associate with people who are most conducive to encouraging and cheering on your financial journey. If the people you associate with see money as evil, object to capitalism and find wealth a foreign concept then your financial health and well being is going to be influenced by their views. Whether we like it or not we are all influenced to some extent by the people we spend our primary time with. If you aspire to achieve financial security then you need to find a mastermind of people in your life whom you can all encourage and help each other.

6. Gambling Is A Fools Game

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." - Warren Buffett

While we are young and naive we choose to take risks with our money that are dumb and stupid. Trying to hit a home run with your money every time is a losing proposition with long term consequences. To chase investments that offer a high rate of return you must also assume that it also comes with a higher rate of risk. Bill Gates once quipped "Warren’s and my betting has always been confined to $1 bets" when talking about them paying poker together. If two billionaires take risk management this seriously, it’s time we average punters did the same thing.

7. Give Back To The Community

"Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars." - Warren Buffett

They say that to have more you need to give more. A contradiction in terms, maybe, but it’s a simple truth that is as enduring as time. As the bible says "It is more blessed to give than to receive -Acts 20:35". Buffett has announced in 2006 that he was giving away over $30 billion to the Bill and Melinda Gates Foundation making it at the time of writing the largest charitable donation in history. He also contributes large sums to his children’s charitable foundations.

8. Generosity and Abundance Goes Hand In Hand

"Even though Ben Graham [Buffett's mentor] had everything he needed in life, he still wanted to give something back by teaching, So just as we got it from somebody else, we don’t want it to stop with us. We want to pass it along too." - Warren Buffett

A famous bible quote goes: "What benefit will it be to you if you gain the whole world but lose your own soul?" - Mark 8:36. The path to wealth isn’t a solo endeavor. How sad would life be if you come to the end of your life and there is no one to share it with. So as you journey on your path to financial abundance remember that there will be many people who generously helped you on your journey so it is only fitting to pay it forward when the opportunity arises. Generosity with your time, with your money, with your resources are great virtues to have. The greatest ally to building a strong friendship is to help others achieve what they want from life.

I leave you with this last quote "You only have to do a very few things right in your life so long as you don’t do too many things wrong." - Warren Buffett

Short-Selling Will Short-Change You

Short-selling is the process of selling borrowed shares with the hope of buying them back at a lower price. To me, it’s a sucker’s bet. The odds are stacked against you. The likelihood of permanent loss of capital is greater than if you simply go long, and your potential gain is fixed. An unlevered short position has a maximum payoff ratio of just 2-to-1.

Throughout their careers, Berkshire Hathaway’s   (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett and Charlie Munger have typically avoided shorting stocks. If the world’s best aren’t doing it, odds are you shouldn’t be doing it, either. I know that as an ardent disciple of Buffett and Benjamin Graham, I will most likely go through my entire investment career without having ever shorted a single share.

But if you do short, understand that in the meantime, while you are waiting for your stock to drop, a host of market participants are working to push the stock up.

The overvaluation argument

The most common reason to short a stock is that it’s grossly overvalued. However, a company’s management team, through some very clever tactics, can increase the per-share intrinsic value of the business without adding any tangible value whatsoever.

Value investor Mohnish Pabrai provides a brilliant illustration in his book Mosaic: Consider a company that has land worth $100 million and no other assets or liabilities. Further assume that the company’s market cap is $1billion, or 100 million shares trading at $10 a share. At that share price, the company is being valued at 10 times the intrinsic value of the land. Management then decides to issue a secondary offering of 500 million shares at $10 per share. The new balance sheet looks like this:

• Cash: $5 billion (offering proceeds)
• Land: $100 million
• Total assets: $5.1 billion
• Market cap: $6 billion

So what once appeared to be a great short candidate selling for 10 times intrinsic value — 1,000% overvalued — is now selling for about 17% above intrinsic value. As Pabrai eloquently put it, "The shorts just got hosed."

The inevitable short squeeze

Most market participants operate within a very emotional state of mind constantly dictated by fear and greed. When the slightest tinge of bad news surfaces, fear overcomes the markets and stock prices begin to tank. Hoping to cash in, people begin short-selling, in hopes of profiting on the way down. Once a heavily shorted stock begins to rise, short-sellers begin buying back shares to close out their positions. The heavy buying pushes the stock way up, and when it’s all over, only the luckiest of short sellers will have made a profit. This silly type of investing relies more on luck than anything else for a potential profit.

The idea that short-selling is a smart way to hedge a portfolio rarely ever makes sense, either. With thousands of publicly traded equities available today, one can construct a well-hedged portfolio composed entirely of long positions. Pabrai, who has been running his hedge fund for almost nine years now, has never shorted a stock, yet has returned more than 27% net annualized to his investors over that time. I can’t think of a single short seller who has come close to that level of sustained performance.

Successful investing requires patience and discipline. Short selling forces you to watch the ticker tape each day in hopes that your timing was right. And unlike a long position, a short position that moves against you will at some point require the addition of capital to meet margin calls. Before you know it, your investing activities are being dictated by the movement in the short position, and any disciplined approach has been tossed out the window.

Beat the Stock Market by Ignoring It

You know what you’re supposed to do. Waiting for "fat pitches" is just as smart as walking away when you’re winning big at the casino. But if you never seem to be able to do either of those things, consider another way to beat the stock market: Ignore it.

Short end of the stick?

Think about your relationship with the stock market. Does it get the better of you, or do you get the better of it? Do you find yourself cursing Wall Street on a regular basis? Do you feel like Mr. Market walks all over you? Maybe it’s time to take control in this relationship and show the stock market who’s boss.

Many magazine articles have pointed out that Warren Buffett doesn’t have a computer, a Bloomberg terminal, or a Quotron matchine (back when they were still used). If an investor whose net worth fluctuates by hundreds of millions of dollars on a daily basis ignores the stock market, perhaps that’s a big hint for the rest of us as well.

Break up to make up

Fools should also refuse to have anything to do with Mr. Market unless he buys your friendship. If you read Warren Buffett’s shareholder letters, you’ll notice that the Oracle of Omaha is perfectly content to ignore Mr. Market for weeks, months, and even years.

In fact, Buffett’s only interested when Mr. Market gets extremely depressed, willing to part with his crown jewels for a song. Mr. Market’s bipolar disorder allowed Buffett to buy shares of stellar performers like M&T Bank (NYSE: MTB) and Torchmark (NYSE: TMK) at around nine times earnings, and Wells Fargo (NYSE: WFC) at a stunningly low five times earnings.

Ways to Evaluate A Company

Some investors may be wondering, between return on equity (ROE) and price earnings ratio (PER), which method is more suitable to value a company.

Warren Buffett said a good business should be able to achieve good ROE without employing high debts. Companies with high gearing are vulnerable to financial risk during the economic downturn and high interest rate environment. 

Besides, any future investment plans should be funded by internally generated cash flow without having to call on shareholders to contribute. Unless the return generated from the shareholders’ money is greater than ROE, it will show lower shareholders’ returns as a result of the enlarged share capital.

One of the biggest weaknesses in ROE method is that it does not take into account the current price of a share. A good company may show high ROE but its market price may be reaching all-time high. Hence, any investors who are solely dependent on the ROE method may be purchasing a stock at a very high price, which does not provide investors with margin on safety (MOS).

PER is defined as the market price of a company divided by its earnings per share (EPS). The principle behind this method is the concept of payback period. This ratio tells us how many times the price is greater than the annual earnings of a share. For example, Company A is currently selling at a PER of 15 times. This means that it takes 15 years for an investor to get back his returns

through the company’s annual earnings, assuming that the company will produce the same EPS during that period. 

Select stocks with low PER, but ?

First, we have to understand what causes a company stock to be sold at a low PER, where the market price is lower relative to its earnings. An unduly low price for a company may be due to the market’s failure to recognize its true earnings picture and potential. In this case, the company’s PER is usually far below the market PER. 

However, not all stocks with low PER imply good value for investing. As mentioned earlier, sometimes the cheap valuation may be a true reflection of certain negative aspects of the company, for example, poor corporate governance, high gearing, uncertainty of future earnings and or it is facing litigation.

However, as a result of asymmetric information, not all investors are fully aware of the market’s worries. Hence, analysts with the necessary knowledge, skills and market information play a very critical role in helping investors to analyze companies in detail and identifying those that are truly undervalued based on fundamentals.