Buffett's Tips A Guide to Financial Literacy and Life

What if you could learn financial literacy from Warren Buffett himself? 

Finance is a language like any other: the more fluently you speak it, the further—and more comfortably—you travel. And if you want to improve your financial literacy, what better teacher could you have than Warren Buffett? Often described as the greatest investor of all time, Warren Buffett started his investment firm with$100 in the late 1950s and went on to become the billionaire and sage we know today. Along the way he’s reaped huge profits for fellow investors in Berkshire Hathaway and remains one of the most sought-after and closely watched figures in the business world.  

So how did he do it? In Buffett’s Tips, award-winning professor and professional investor John M. Longo demonstrates just how by translating decades of Buffett’s writings and media appearances into a 100 straightforward tips and strategies anyone can follow for enhanced financial literacy and independence, including:  

• Essential concepts like the time value of money and compound interest 
• Basic financial instruments, such as savings and checking accounts and certificates of deposit 
• Approaches to valuing stock, including discounted cash flow and relative valuation 
• How to build a portfolio in accordance with Buffett’s two golden rules 

Whether you want to grow your personal finances, develop your business acumen, or improve softer career skills such as emotional intelligence, there’s no one better to learn from than the most famous investor in the world—and no better way to do that than having a copy of Buffett’s Tips close at hand.  

JOHN M. LONGO is a Professor of Profes- sional Practice in the Finance and Economics Department at the Business School of Rutgers University. He has also been visiting professor of finance at EMBA-Global Asia—the joint Executive MBA program of Columbia Business School, London Business School, and The University of Hong Kong. He has more than 25 years of professional investment experience and is currently serving as Chief Investment Officer of Beacon Trust, a $3+ billion registered investment advisor. A Chartered Financial Analyst (CFA), Professor Longo earned an MBA in Finance and a PhD in Finance from Rutgers, where he also received his BA degree.

TYLER J. LONGO is a high school student in the Princeton, NJ area. He has completed the Introduction to Business, Finance, and Economics program for high school students at Columbia University and additional coursework in AP Economics, AP Statistics, and Financial Literacy. He has become financially literate in large part due to his work on this book.

Preface v

Acknowledgements vii

Chapter 1: Who Is Warren Buffett? 1

Introduction 1

Buffett the Teen 1

Who Are We to Write this Book? 2

What Is Financial Literacy and Why Does It Matter? 3

Some Fundamental Buffett “Tips” 3

Buffett’s Work Ethic 5

Buffett Has Spent a Lifetime Learning 6

Why Is Buffett Happy? 8

Improve Your Communication Skills and See Your Lifetime Earnings Increase 50% 8

Acting with Integrity is the Right Thing to Do and Good for Business 9

Buy Low, Sell High 10

Buffett Doesn’t Succumb to Peer Pressure: The Inner Scorecard 11

Buffett’s Fallback Career - Comedian 12

Buffett’s Lasting Legacy: Philanthropy 13

Buffett’s Tips from Chapter 1 14

Chapter 1 References 15

Chapter 2: Investment Fundamentals According to Buffett 18

Introduction 18

The “Miracle of Compound Interest” Explained 18

Tradeoffs: A Fundamental Principle of Life 20

The Saint Petersburg Paradox: A Lesson on Risk and Return 21

Risk and Return: The Evidence 22

Diversification: One of the Few Free Lunches in Life 24

Supply and Demand Determine Price 25

Summary on Financial Fundamentals 26

Buffett’s Tips from Chapter 2 27

Chapter 2 References 28

Chapter 3: Bank Accounts and Credit Cards 29

Introduction 29

Insured Bank Deposits 29

Savings Accounts and Certificates of Deposit (CD) 30

Checking Accounts and Electronic Bill Payment 31

Parts of a Check 32

Balancing a Checkbook 33

Debit Cards and Automated Teller Machines (ATM) 34

Credit Cards and Charge Cards 35

Apps to Send Money: PayPal, Venmo, Zelle, Apple Pay, Android Pay, etc. 37

Your Credit Score: A Report Card of Your Financial Responsibility 38

Personal Bankruptcy: Try to Avoid at all Costs 40

A Word on Bitcoin from Buffett 40

Buffett’s Tips from Chapter 3 42

Chapter 3 References 43

Chapter 4: Bonds and Inflation 44

Introduction 44

U.S. Savings Bonds 44

Other U.S. Treasury Fixed Income Securities 45

Income and the Consumer Price Index (CPI) 47

Bond Ratings and Corporate Bankruptcy 48

Corporate Bonds, Municipal Bonds, and Bowie Bonds 50

Bowie Bonds and Other Asset Backed Securities 50

The Federal Reserve: The Central Bank of the United States 51

What Determines Interest Rates? 53

Intuition on Estimating the Price of a Bond 54

So, Are Bonds Good Investments? 55

A Note on Negative Bond Yields 56

Buffett’s Tips from Chapter 4 56

Appendix: Bond Valuation 57

Chapter 4 References 58

Chapter 5: Stock Market Fundamentals 59

Introduction 59

Initial Public Offerings (IPOs): The Birth of a Stock 59

Investment Banks and Investment Bankers 59

The Main Event: The Stock Begins Trading on the Stock Exchange 60

The Stock Exchange 61

A Sidebar on Stock and Mutual Fund Symbols 63

Dividends 64

Large Cap vs. Small Cap 66

Growth vs. Value 68

Domestic vs. International 69

An Index Fund: A Great “Set It and Forget It” Long Run Investment 70

Beating the Market and the Efficient Market Hypothesis 71

Meet Mr. Market, the Manic-Depressive Stock Market 72

Buffett’s Tips from Chapter 5 73

Appendix: Selling Short (or the “don’t try this at home” area of investing) 74

Chapter 5 References 76

Chapter 6: Buffett’s Approach to Stocks 77

Introduction 77

Estimating the Value of a Stock 77

Getting a Price Target with the Discounted Cash Flow Model 77

Getting a Price Target with the Wall Street P/E Model 79

Buffett’s Approach to Stocks 80

Getting into the Buffett Mindset of Investing 81

Stay Within Your Circle of Competence 82

The Importance of Being Patient 82

Good vs. Bad Companies and the Passage of Time 83

How Buffett Thinks About Change in an Industry 84

Types of Businesses Buffett Likes 84

A Moat Around a Business is a Recipe for Success 84

Demonstrated Consistent Earnings Power 85

Look for Companies with Good Management 85

But Good Management Can’t Help Sinking Industries 85

Buy Companies That Have the Power to Overcome Inflation 86

Focus on Firms with Favorable Long-Term Prospects 87

When to Sell 88

Summarizing Buffett’s Approach 89

Buffett’s Tips from Chapter 6 90

Chapter 6 References 91

Chapter 7: Accounting Fundamentals 93

Introduction 93

The Income Statement: A Company’s Report Card for One Period 94

Apple’s Income Statement 94

The Balance Sheet: A Picture of the Company’s Report Card Since Inception 98

Current Assets 99

Long-Term Assets 100

Liabilities 101

Current Liabilities 102

Long-Term Liabilities 103

Stockholders’ Equity 103

A Quick Note on the Statement of Cash Flows 105

Summary 105

Buffett’s Tips from Chapter 7 105

Chapter 7 References 106

Chapter 8: Buffett’s Approach to Portfolio and Risk Management 107

Introduction 107

The Key to Selecting a Well Diversified Portfolio: Correlation 107

A (Theoretical) Portfolio with No Risk 108

Selecting an Optimal Diversified Portfolio: The “Business School” Approach 109

Buffett’s First Approach to Portfolio Selection: Index Funds 111

Buffett’s Second Approach to Portfolio Selection: Expert Mode 111

A Compromise Portfolio Solution 112

Home Many Stocks Make a Diversified Portfolio? 113

The Business School Approach to Risk 114

Buffett’s Critique of the Business School Approach to Risk 116

Buffett’s Approach to Risk 116

Buffett on Gold 117

Summarizing Buffett’s Views on Risk 118

Buffett’s Tips from Chapter 8 119

Endnote on CAPM 119

Chapter 8 References 120

Chapter 9: Business 101: Companies 122

Introduction 122

The Dow Jones Industrial Average: The Oldest U.S. Stock Market Index 122

How The Dow is Calculated 123

An Explanation of Stock Splits 124

Different Share Classes and Buffett on Stock Splits 125

Current Stocks in the Dow Jones Industrial Average 126

Materials Stocks in The Dow 126

Consumer and Business Services Stocks in The Dow 127

Consumer Goods Stocks in The Dow 128

Financial Stocks in the Dow 130

Healthcare Stocks in the Dow 132

Industrial Stocks in the Dow 133

Technology Stocks in the Dow 134

Telecommunications Services Stocks in the Dow 135

Some Blue-Chip U.S. Stocks That Aren’t in the Dow 135

The FANG Stocks – They Don’t Bite 136

China’s Emerging Titans 137

Some International Energy Titans 137

Some Global Consumer Titans 138

Some Global Financial Services Firms 138

Buffett’s Tips from Chapter 9 138

Chapter 9 References 139

Chapter 10: Business 101: People 142

Introduction 142

Past Business Leaders 142

Present Business Leaders 147

Buffett’s Tips from Chapter 10 154

Chapter 10 References 155

Chapter 11: Being Thrifty Like Buffett: Ways to Save Money 158

Introduction 158

Your Library: Free Books, Magazines, Newspapers, Music, Movies, and More 158

Free Educational Courses: Khan Academy, Coursera, edX 160

Websites for Free Stuff 160

Free Activities 161

Amazon.com: The World’s Biggest Store 162

Comparison Shopper Tools: Your New Best Friend 163

Barter: Turning A Cell Phone into a Porsche 164

Eat A Low-Cost Meal, Periodically 165

Shop Private Label and Generic Items 165

Clothes: Outlet Stores, Vintage Items, and Buying Off-Season 166

Buying Gasoline 168

Coupons, Double-Couponing, Triple-Couponing, and Groupon 168

Rewards Programs 169

Negotiating with Cell Phone, Cable, and Other Service Providers 170

Yard Sales, Flea Markets, and More: Turning Trash into Treasure 171

Do-It Yourself 172

Donate Things to Charity 172

Avoid Shooting Yourself in the Foot with Bad Habits 172

Tying It All Together in A Budget 173

Buffett’s Tips from Chapter 11 174

Appendix: Sample Budget 175

Chapter 11 References 176

Chapter 12: Buffett’s Views on Cars and Homes 178

Introduction 178

Do You Need a Car? 178

New Cars vs. Used Cars 179

Buying vs. Leasing a Car 180

The Best Time to Buy or Lease a Car 182

Home Basics 183

Finding a Home 184

Bidding for a Home 184

Paying for a Home: The Down Payment 185

Paying for a Home: The Mortgage 186

A “House Hack”: Getting Someone to Pay (Most of) Your Mortgage 187

Looking Under the Hood of a Mortgage 188

Buffett’s Tips for Chapter 12 191

Chapter 12 References 178

Chapter 13: Buffett on Dale Carnegie, Communication Skills, and Emotional Intelligence 194

Buffett Learns Life Changing Skills in a Dale Carnegie Course 194

CliffsNotes Version on Dale Carnegie and How to Win Friends and Influence People 195

Things How to Win Friends and Influence People Will Do for You 196

Techniques in Handling People According to How to Win Friends and Influence People 196

Six Ways to Make People Like You According to How to Win Friends and Influence People 199

How to Win People to Your Way of Thinking, According to How to Win Friends and Influence People 200

What Is Emotional Intelligence (EQ)? 202

Emotional Intelligence (EQ): Some Details 203

Have a Great Posse 206

Buffett’s Tips for Chapter 13 208

Chapter 13 References 209

Chapter 14: Buffett’s Tips for College 212

Introduction 212

College: The Basics 212

Getting into a College 213

Graduate School: Optional for Some Jobs, Mandatory for Others 215

Paying for College: Scholarships and Grants 216

Paying for College: The 3 Year Plan for Super Achievers 217

Paying for College: 529 Plans 217

Paying for College: Student Loans 217

Paying for College: On and Off Campus Jobs 219

Your Resume: A Snapshot of Your Qualifications for a Job 220

Putting Together Your Resume 220

The Objective Section 220

The Education Section 221

The Work Experience Section 222

The Skills Section 223

The Activities & Interests Section 223

Cover Letter 224

Buffett’s Tips from Chapter 14 224

Appendix: Sample Resume 225

Appendix: Same Cover Letter 226

Chapter 14 References 227

Chapter 15: Buffett’s Tips for Careers 228

Introduction 228

LinkedIn Profile: Your Online Profile 228

Finding an Internship or Job 229

The Job Interviews(s): Preparation 230

The Job Interviews(s): Acing Your Interviews 232

The Job Interview(s): Compensation or Show Me the Money! 234

Succeeding on the Job 235

Financial Paperwork After Getting a Job 237

Forms W-2 and W-4 237

Form 1040: The Annual Tax Form and “The Buffett Rule” 238

Retirement Plans 239

Becoming a 401k or IRA Millionaire 240

Buffett’s Tips from Chapter 15 241

Appendix: Health Benefits Information 242

Appendix: Form W-2 245

Appendix: Form W-4 246

Appendix: Form 1040 247

Chapter 15 References 248

Chapter 16: Buffett’s Tips for Philanthropy 250

Buffett’s Huge Gift and The Giving Pledge 250

Getting Involved in Philanthropic and Charitable Activities 252

Measuring Performance 253

Market Based Economies Are Good… Unless You Wind Up as Roadkill 254

It’s Not All About the Benjamins 256

The Loss of Reputation Huts More Than the Loss of Money 257

Inheritance Matters 259

Buffett’s Definition of Success 259

Buffett’s Tips from Chapter 16 260

Appendix: Charitable Lunch Auctions for Warren Buffett Benefiting Glide Foundation 261

Chapter 16 References 262

Appendix: Glossary of Financial Terms in Plain English 263

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