Buffett’s tips 3

Warren Buffett’s advice to Wealth Managers, Wealth Owners and everyone.

WELREX^® Director John Longo, CFA recently published, in collaboration with his son Tyler Longo, “Buffett’s Tips: A Guide to Financial Literacy and Life”.

In the third of three articles we complete our distillation of the key lessons from John and Tyler’s in-depth study of the “Sage of Omaha”.

What else can a close study of Warren Buffett teach us?

Peer pressure can be one of the hardest things for people to deal with, whether in their youth or in adult life. It can be hard to say no when your friends are asking you to do things, even when you think they might be wrong. Like all of us, Warren Buffett experienced peer pressure, but he developed a response for dealing with peer pressure. It’s something he learned from his father, Howard Buffett. He calls this having an “Inner Scorecard”. It basically means living your life on your own terms, according to your own self-judgment. If you are influenced more by what others think, then you have an “Outer Scorecard”. Buffett said, “The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.” That is, try not to worry too much about what other people think. Do what you think is right. Buffett gave a provocative example when he said, “Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?” Someone following an Inner Scorecard would prefer to be judged by the first question, while someone with an Outer Scorecard would prefer the latter one.

Buffett went on to say, “In teaching your kids, I think the lesson they’re learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll end up with an Outer Scorecard.” Buffett applies an Inner Scorecard to all areas of his life, despite his multi-billionaire status. He lives a fairly modest existence, residing in the same house—not a mansion—since 1958.

From an investment standpoint, he is not afraid to go against the crowd. In fact, that’s where you can make the most money if you’re right. Buffett famously said, “Be fearful when others are greedy and greedy when others are fearful.” He put this famous saying into action during the Global Financial Crisis of 2007–2009, one of the biggest downturns in developed economies since World War II. Financial firms, such as Citibank, Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley, and American International Group (AIG), were among the most affected during the crisis. In this context, Buffett bought stock in Goldman Sachs and General Electric, which had a big financial division. Later, he bought stock in Bank of America. And when the economy recovered, he made a very healthy return for his shareholders, profiting to the tune of billions of dollars on each investment. John and Tyler Longo wrote their book as the COVID-19 pandemic was unfolding – with Berkshire Hathaway sitting on a pile of more than $125 billion in cash. So, one wouldn’t bet against another set of great outcomes from Buffett and Berkshire in the future, based on another series of purchases of great companies at great prices. More recently, he has been buying Energy companies, loading up on Chevron and Occidental Petroleum.

Buffett is also a strong advocate of acting with integrity in everything you do – because it’s the right thing to do and is right for business.

Whilst never perfect and with a record of getting himself into a bit of trouble when he was a teen, Buffett has always been known for his integrity almost as much as he is known for his wealth. There are numerous examples of this across Buffett’s long life and career. When in the late 1960’s he was investing money for some family, friends and acquaintances, and despite achieving exceptional results, he decided to close his investment business and give investors their money back because he felt the stock market was too expensive and his style of investing had fallen out of favour.

Buffett tells his employees to act so that they wouldn’t be embarrassed if they saw their actions written up by a reporter in their local newspaper for all to see. Today, you might substitute “newspaper” for Facebook, Instagram, or Snapchat. In Berkshire’s 1990 Letter to Shareholders, Buffett wrote, “We will behave exactly as promised, both because we have so promised, and because we need to in order to achieve the best business results.” That is, behaving with integrity isn’t only the right thing to do morally, it makes for good business.

Buffett called out this belief very forcefully in the 1990s when traders at one of his investments, Salomon Brothers, was failing after some of the investment bank’s biggest traders broke some securities laws. Buffett agreed to step in and run the firm to try to prevent it from going under. He was asked to testify before US Congress, which was conducting a hearing on the trading scandal. In his opening remarks, Buffett uttered one of his most famous phrases, “Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless.”

And finally, philanthropy and giving back to society. It’s well known that Buffett donates 99% of his money to philanthropic organisations, which proves that his quest to become the richest person in the world was about the love of his work and not about the money.

It’s fair to imagine that in a generation or two from now, people may remember him more for his philanthropic work than for his investment prowess. The point is Buffett didn’t become rich to purchase a lot of bling. That’s not how he rolls. He said, “If you’re in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”

Giving back to society seems a very good way to end our summary of some of the key lessons we can learn from “the Sage of Omaha”.