Search Results for: snowball

Tidbits From Warren Buffett’s Biography, The Snowball: The Early Years

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snowball_bookI am currently reading The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. As an authorized biography of Warren Buffett intended for the general public and not a book specifically about investing per se, I think that so far it is excellent. I have only recently started learning more about Buffett, but he is certainly an intriguing person. Schroeder is an excellent writer, and provides both detail and insight into his life as well as does a especially good job of explaining the financial aspects of his activities.

Here are some of the notes that I took while reading the book so far, covering his early years:

  • The Snowball title is a metaphor. “Life is like a snowball. The important thing is finding wet snow and a really long hill” How did Buffett’s portfolio grow so big? He started early, and with relentless focus came the power of compounding returns. (He specifically states that credit card debt is a huge obstacle in starting your own snowball!)
  • As a teenager, why did Warren want money? A quote from Buffet:

    It could make me independent. Then I could do what I wanted to do with my life. And the biggest thing I wanted to do was work for myself. I didn’t want other people directing me. The idea of doing what I wanted to do every day was important to me.

    A amazingly common sentiment among those that end up very rich. Independence, not money, as the primary goal.

  • Since he felt socially awkward growing up, he was inspired by Dale Carnegie’s now-famous book How to Win Friends and Influence People. Here are some of the rules that he took upon himself to follow:

    Everyone wants attention and admiration. Nobody wants to be criticized.
    The sweetest sound in the English language is the sound of a person’s own name.
    The only way to get the best of an argument is to avoid it.
    If you are wrong, admit it quickly and emphatically.
    Ask questions instead of giving direct orders.
    Give the other person a fine reputation to live up to.
    Call attention to people’s mistakes indirectly. Let the other person save face.

  • By the time he was 16 years old, Warren Buffett had saved up $5,000. This was primarily through delivering over 500,000 newspapers, along with other small enterprises. If adjusted for inflation, $5,000 at that time would be the equivalent of $53,000 in 2007. Talk about a head start for that snowball.
My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


RIP Charlie Munger: Thank You For Sharing Your Wit and Wisdom

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Many investors around the world were saddened to hear that Charles T. Munger passed away on November 28th, 2023, only about a month before he would have turned 100 years old. Most people discovered him through his long friendship and business partnership with Warren Buffett, and many of us enjoyed the fact that he was more bluntly honest, more revealing at times, and overall a great compliment to Buffett.

For the certain type of self-motivated person, his message simply resonated. Lifelong learning. Frugality and delayed gratification. Putting up with adversity and not complaining. Spending your time as you want. There will be many tributes, and here I’ll simply share some of my favorite Munger quotes over the years. Poor Charlie’s Almanack: The Essential Wit and Wisdom of Charles T. Munger (cover of new edition above) is another great repository of his past speeches and wisdom.

His desire for independence starting at a young age. From Damn Right! A Biography of Charlie Munger (my review):

When Charlie’s grandparents read and reread Robinson Crusoe to him, they planted a notion in his head. “He wanted to be rich so he could be completely independent, like Crusoe on his island, and not have to do what anybody else said.”

I had a considerable passion to get rich. Not because I wanted Ferraris – I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t where I got that notion from, but I had it.

Working and saving hard early on to start your snowball. Charlie Munger was financially independent at age 38 in 1962.

The first 13 years I practiced law, my income [from practicing law] was $300,000 total. At the end of that 13 years, what did I have? A house. Two cars. And $300,000 of liquid assets. Everyone else’d have spent that slender income, not invested it shrewdly, and so forth.

I just think it was, to me, it was as natural as breathing, and of course I knew how compound interest worked! I knew when I saved $10 I was really saving $100 or $1,000 [because of the future growth of the $10], and it just took a little wait. And when I quit law practice it was because I wanted to work for myself instead of my clients, because I knew I could do better than they did.

Work for yourself an hour each day. Like the schoolteacher I just read about that now makes $10,000 a month creating worksheets and selling them to other teachers, Charlie looked beyond his current working situation. From The Snowball:

Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.

The first $100,000 is the most difficult:

Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.

If you do it right, you only have to get rich once.

The beauty of it is: you only have to get rich once. You don’t have to climb this mountain four times. You just have to do it once.

Lifelong, continuous learning. From a commencement speech within Poor Charlie’s Almanack:

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent. But they are learning machines. They go to bed every night a little wiser than they were that morning.”

On living a happy life and surrounding yourself with good people.

You want to have reasonable expectations and take life’s results good and bad as they happen with a certain amount of stoicism. There’ll never be any shortage of good people in the world. All you got to do is seek them out and get as many of them as possible into your life. Keep the rest the hell out.

Simply avoid certain things. From How To Make Your Life Completely Miserable:

Let me use a little inversion now. What will really fail in life? What do you want to avoid? Such an easy answer: sloth and unreliability. If you’re unreliable it doesn’t matter what your virtues are. Doing what you have faithfully engaged to do should be an automatic part of your conduct. You want to avoid sloth and unreliability.

He has also advised keeping an extremely wide chasm between you and gambling, alcohol, and drug addiction. Why even mess around with things that could destroy your life completely?

Optimism for the future. He may sound cranky a lot, especially when he was a loud critic of crypto during it’s boom, but his overall message was of one of optimism. From the book University of Berkshire Hathaway:

However, Munger beamed that Berkshire’s best days of contributing to civilization are ahead. He noted that mankind is getting close to solving the technical problem of our time -solar power. Cheap, clean, storable power will change the world. Munger said, “As I get closer and closer to my death, I get more cheerful about the future I won’t see.”

[…] Munger may have surprised the crowd with a list of things he is quite optimistic about: The main problems of civilization are technical and solvable, all with energy, with huge benefits for civilization. Berkshire’s culture will continue to work for years to come. He likes to see people rising rapidly from poverty, and that is happening in China and India.

More sources of Charlie Munger wisdom:

Thank you, Mr. Munger. Learning from your wisdom and example has materially improved my own life (and indirectly that of my family) in many different ways.

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2023 Berkshire Hathaway Annual Shareholder Meeting Video, Transcript, and Notes

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The 2023 Berkshire Hathaway Annual Shareholder Meeting occurred on May, 6 2023, and while there are articles offering highlights (including this one), it’s never the same feeling as watching/listening to the actual thing. I always find a few things that mean something to me, even if just a small side remark, that don’t make it into the financial news headlines. Warren Buffet (92) and Charlie Munger (99) continue to impress with their amazing mental acuity and stamina.

CNBC again has the rights to record and host the full video and transcripts (morning session, afternoon session) and they did a nice job with syncing the text and sound on the afternoon session (the morning one didn’t work for me). Here are a few personal takeaways and notes.

Overall, I am reminded that Buffett regards Berkshire Hathaway as his life’s work and masterpiece. He may not have much time left to paint, but it is already beautifully constructed. It is built to prosper in the long-term, but also to withstand anything thrown at it in the short-term. This is how I wish to build up my family’s finances as well. A large engine of productive investments that create growing profits and cashflow. Always having a sizable cash holding as well, never having worry about market crashes or liquidity needs. Berkshire sells insurance to cover the rare events, and I buy them to protect us from those types of events (life, home, auto liability, umbrella).

Autopilot. Buffett points out that it will be hard to judge how well his successors are doing, as by design, Berkshire will operate very well even mostly on auto-pilot. The subsidiary companies all have their own managers. The stocks are bought with the intention of holding for a long time if not forever. This reminds me that I should make our finances more auto-pilot as well. I may enjoy the micro-management now, but I worry that I am making things too complicated in a situation where I’m not around.

The benefits of being financially independent. No boss above telling you what to do, but also no direct customers to please.

[Warren Buffett speaking about Charlier Munger] He didn’t want to sell his time, maybe at 20 bucks an hour or something, to people he thought were making the wrong the decisions. And he knew more about it than they did. And that just did not strike him as a good way to go through life. And I think he’s probably right on that.

I think he’d have really gotten to be miserable if he had to keep doing that. It’s just no fun. It’d be like me giving investment advice to somebody that — or taking it from somebody. I just wouldn’t want to do it. And Charlie figured that out. And so, we decided to work for ourselves. And this worked. Been happy, happily ever after.

Charlie Munger was a successful lawyer, but he didn’t want to give advice to people who often wouldn’t take it. Warren Buffett could have been a investment manager or financial advisor, but he also didn’t want to give advice to people who often wouldn’t take it. I have thought about becoming a financial advisor of some sort, but I think it would be very difficult to spend your time carefully crafting advice and then seeing someone just do the opposite. As a self-directed investor, I enjoy the fact that I can do my own research, make my own decisions, and implement them as I wish. It takes a while to build up your first $100,000, but there is a reason why his biography is called The Snowball.

Berkshire shareholders as the frugal millionaires. I have to admit, I enjoy the stereotype that Berkshire Hathaway shareholders tend to be frugal, practical, and not focused on outward appearances. Here’s a funny anecdote that speaks to that (even though Munger now flies NetJets, a Berkshire subsidiary).

CHARLIE MUNGER: I used to come to the Berkshire annual meetings on coach from Los Angeles. And it was full of rich stockholders. And they would clap when I came into the coach section. I really liked that. (LAUGHTER) (APPLAUSE)

How to live a good and successful life. Buffett has said this quote before, but it’s a good one:

…you should write your obituary and then try and figure out how to live up to it.

Charlie Munger expands:

CHARLIE MUNGER: Well, it’s so simple to spend less than you earn, and invest shrewdly, and avoid toxic people and toxic activities, and try and keep learning all your life, et cetera, et cetera, and do a lot of deferred gratification because you prefer life that way. And if you do all those things, you are almost certain to succeed. And if you don’t, you’re going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game where you’re very likely to win without having any unusual luck.

… the toxic people who are trying to fool you or lie to you or aren’t reliable in meeting their commitments. A great lesson of life is get them the hell out of your life. […] And do it fast. […] I don’t mind a little tact. Or even a little financial cost. But the question is getting them the hell out of your life.

Again, my favorite way is to listen to the audio track of the CNBC or YouTube videos in the car like a podcast over multiple days. If you’d rather read more detailed notes, check out the CNBC Liveblog, Kingswell and Rational Walk.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Behavioral Activation: Mood Follows Action

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On top of everything else, December and January are busy times for finance as well. There are “year-end moves” like tax-loss harvesting, rebalancing your portfolio, making sure you contributed to your 401k/IRA/HSA/FSAs, and charitable giving. Then comes “New Year’s resolution” season with new goals to reduce debt, set up a savings schedule towards a house downpayment, increasing retirement contributions, and so on. Unfortunately, none of those things are as fun as checking your phone.

If you’re like me and looking for some additional motivation at times, consider the concept of behavioral activation. While behavioral activation is used as a serious treatment for depression, but it can also be applied to general wellness. From the Outside magazine article Why You’re Tired All the Time:

Your brain is doing everything it can to trick you into staying in bed all day, when the best thing to break out of the cycle would be to get up and go, or what psychologists call “behavioral activation,” which is a gold-standard treatment for depression. This isn’t to say the sensations of lethargy, dullness, and torpor are not real—they are, and they can be quite paralyzing. But those sensations, as far as we know, are not organic, not caused by a lack of sleep, an expenditure of physiological resources, or something wrong in the body, for example. If they were, taking action would make the situation worse. But, as research shows, with depression, taking action—particularly when supported by therapy—tends to make the situation better.

From 7 Wellness Strategies to Build Resilience:

On days when you’re down or anxious and want nothing but to sit in bed, nudge yourself into doing something—whether it’s calling a friend, accomplishing some creative work, exercising, or cleaning. Even if you have to force yourself, just get started. Research shows that behavioral activation—a strategy that involves doing something even if you don’t feel like it—is one of the most effective ways to change your mood. Intrusive thoughts and feelings are stubborn. This is why nonsense advice like “think positive” usually fails. Mood follows action. If you know your core values and act in alignment with them regardless of how you’re feeling, you give yourself the best chance at turning your mood around.

You are trying to break any negative cycles, and jump-start a positive cycle. From @christophburch:

Take action first, don’t wait for mood. Positive-reinforcement cycles are why methods like the “debt snowball” work so well. Any time you hear “Couple goes from zero savings to $20,000 in the bank”, that’s didn’t happen overnight; it was a positive reinforcement cycle. A little progress feels good, which makes it easier to keep going, and so on.

As a micro-example, when faced with something that I want to be done but don’t want to actually *do* it, I start by doing something positive, enjoyable, specific, and small that I know I can start and finish in less than 30 minutes. Once I am actually doing something positive, I can feel my energy levels improve and it makes it much more likely that I will want to do the next thing. Then I just tell myself to “start” the hard thing. In such a moment, I am more likely to run comparison quotes for auto insurance or make adjustments to my 401k.

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50% of American Households Don’t Own Any Stocks At All

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Here’s another stat to add to your knowledge. For roughly half of Americans, the stock market’s record highs don’t help at all, according to a recent Washington Post article. This chart shows that half of US household have no exposure to stocks, either directly or indirectly:

ownsstock

Direct vs. indirect. The academic paper by Dr. Wolff of NYU was a bit confusing with their terminology. From what I read, “direct” stock ownership means owning individual shares of stock. “Indirect” stock ownership includes “mutual funds, trusts, or various pension accounts”. Here, the term “pension accounts” include defined contribution accounts like IRAs, 401(k), and 403(b) plans. However, assets in defined benefit plans, which is the more traditional definition of the term “pensions”, are not included under “pension accounts”. Social Security is also excluded. Got that?

In theory, you don’t need to own stocks to have a comfortable retirement. You could have a mix of other resources like Social Security, private company pension plan, bank deposits, bonds, whole life insurance, commercial property, residential rental property, and so on. However, I’m willing to bet there is a healthy correlation between owning one and owning multiple forms of these productive assets.

Financial freedom means owning enough productive assets to get off the treadmill of work, spend, work, spend. I know there are probably good reasons why many people have trouble finding the money to invest in stocks. I don’t have an easy fix. However, one small tip for those on the margin is to get that spark and start viewing such assets with desire. The same desire as a nicer car or kitchen remodel. I get excited when I buy another chunk of VTI or VXUS. Others get excited when they acquire another rental property. Find a way to start your snowball.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

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Simple Portfolio Rebalancing Spreadsheet Template (Google Drive)

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gsheetsUpdated. Automated portfolio management services like Wealthfront and Betterment will help you manage a diversified portfolio of low-cost index funds for a fee. While I understand their appeal for those that wish to outsource that task, I choose to maintain my own diversified portfolio of low-cost index funds. I enjoy having full control of all investment decisions, and I like saving the management fee (and adding that money to my snowball).

An important part of this DIY portfolio management is staying close to your target asset allocation. I use a very simple Google Spreadsheet to track my portfolio. Here is the direct link and it is also embedded below. Yellow cells are those meant to be edited.

(Download a free copy: I am sharing this spreadsheet online – free of charge – in read-only format. However, please make a copy of it using the menu option File > Make a copy or download it as an Excel file using option File > Download as). Any requests for edit access to the original public spreadsheet will be denied, because you would be changing the appearance for everyone.)

 

Here are some guidance on how to use the spreadsheet:

1. Decide on a target asset allocation. Don’t use the generic one I put above. There is no perfect portfolio. You can find plenty that look great based on history at this moment, but that will not be the perfect portfolio 5, 10, 25 years down the line. The best portfolio is the one that you can stick through even after your fanciest asset classes have negative returns for 5+ years.

Here are a few model portfolios to get you started. Below is what I have settled on for myself. Details here. You only have to enter this once as long as your target asset allocation stays the same.

2. Enter your total balances for each asset class. The easiest way to grab my holdings from multiple brokerage accounts is to use a aggregation service like Personal Capital (review). If you don’t have that many accounts, simply log into each individual website and add up your totals by asset class.

You could solely rely upon a service like Personal Capital to manage your portfolio, but I tend to use some specific asset classes like “US Small Value” or “Emerging Markets Value” which Personal Capital does not recognize. I do enjoy the fact that it pulls in all of my holdings and balances automatically into one screen and is always updated.

3. Check out the actual breakdown vs. your target breakdown. The spreadsheet shows the current actual percentage breakdown vs. your target breakdown, as well as the dollar amounts of any differences. A positive number means you need to buy more to reach your theoretical target (negative means sell). In the fictitious example shown, I might feel that I was close enough that I wouldn’t really bother with any rebalancing. If things were really off, I could buy/sell as needed.

3. Rebalance with new cashflow, dividends, and interest. Choose your frequency of “forced” rebalancing. By using this spreadsheet, you can see which asset classes should be invested in currently to bring you back towards your target asset allocation. This is where you should invest any new cashflow (i.e. paycheck, dividends, rental income, or interest that your portfolio generates).

In addition, you can rebalance by selling some asset classes and then buying another. I try not to sell too often as to avoid capital gains taxes. You can do this on a set calendar basis such as annually on your birthday or quarterly. Another method is to only rebalance once your percentages are off by a certain amount, like a tolerance band of +/- 5%. I personally check in quarterly to see where I should invest any new cashflows, and if things are really off then I rebalance by selling something at most once a year. If you have sizable taxable holding, you could also attempt some tax-loss harvesting during these check-ins.

Recap. If you are managing your own portfolio, it is important not to stray too far from your target asset allocation. In order to know where you should invest new funds, I track my portfolio in two ways. First, I use Personal Capital for a real-time, daily snapshot of my holdings. Second, I manually update this spreadsheet each quarter and print out a copy for my permanent, physical records. This takes about 15 minutes every 3 months. Using these two methods, I maintain complete control over my portfolio and I don’t have to pay any management fees to a robo-advisor.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

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HBO Documentary: Becoming Warren Buffett

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HBO has a new documentary film called Becoming Warren Buffett that includes a more personal look at his life, including “never-before-released home videos, family photographs, archival footage and interviews with family and friends.” I just watched it on using the HBO Now 30-day free trial. Here’s the HBO trailer:

My notes:

Warren Buffett does have a folksy exterior. He drives around in his own car, eats at McDonald’s, drinks Coke, and still lives in the same house he bought in 1957 for $31,500. He doesn’t have a personal stylist or fashionable clothes. He likes to say things that sound like common sense.

Some people think this is a fake exterior. I don’t think so. Some people take this to mean that “anyone” can get rich buying and selling stocks. I also don’t think so.

Warren Buffett is also extraordinarily intelligent and competitive. His net worth is one of his scorecards. His skill is capital allocation and that involves extreme emotional detachment and rationality. These are features that aren’t visible, and he’s better at it than you are.

Warren Buffett is always learning and improving. Buffett skipped grades, finished high school at age 16, and finished his undergraduate degree in 3 years. However, instead of any degree hanging on his office walls, he has a certificate from a Dale Carnegie course on public speaking. Buffett realized his weaknesses and worked to improve himself.

Charlie Munger shared an analogy with someone who can juggle 15 balls in the air. How did that happen? Well, at some point they started with one ball, practiced, and then two balls, and then practiced some more…

The film does explore his personal life, albeit in a very sensitive and respectful manner. His emotionally volatile mother is mentioned but not explored deeply. His father was a great influence and Warren keeps a picture of his dad on the wall in his office. His late first wife, Susan, was shown as a very kind, considerate person. In her interviews, she came off as very well-spoken, fair, and intelligent. She definitely played a huge part in his overall development. She is also a huge reason that eventually $100 billion is going to charitable causes to improve the world.

Buffett has said many times that he won the “ovarian lottery”. He was born in the United States. He was born a male. He had many opportunities to succeed and support structures if he failed.

As a relatively new and clueless parent, I wonder about his kids. Warren Buffett spent most of his time working and not much time raising the kids. I wonder what they would have been like if their father didn’t become famous and rich. (Supposedly when they were young, Warren really wasn’t all that rich or famous yet.) Today, all three of them appear to be well-adjusted adults, but everyone’s job is to give away their parent’s money. Do they do this out of obligation to their parents? Out of obligation to make sure the money is well spent? Is this the “job they would get if they didn’t need a job”?

Warren attributes his financial success to “Focus”. Was that laser focus detrimental to his family and other personal relationships? What if he had just stopped when he reached $10 million or whatever?

Warren Buffett is worth over $60 billion, yet he doesn’t meet certain definitions of “retirement”. What Buffett has always been keen on is constructing a life that fits him. His version of financial freedom includes sitting by himself and reading 5-6 hours a day and thinking. He’s loved being his own boss since filing his first income tax return at age 13 and taking a $35 tax deduction for the use of his bicycle and watch on his paper route.

I think hero-worshipping can be dangerous when you simply try to follow everything about someone else. Every human has their flaws. We should extract the qualities that we admire, and try to emulate those qualities. Warren Buffett has a lot of worthy attributes and I value his shareholder letters, but I certainly don’t want to “be just like Warren Buffett”. For me, I respect that he basically figured out how he wanted to live his life (no bosses, lots of reading) and that he achieved it an early age. The eventual billionaire status doesn’t really excite me, other than the fact that he managed to remain “grounded” and relatable.

Overall, the film does offer some new personal glimpses but not much new deep material for those that have read his biographies – The Snowball: Warren Buffett and the Business of Life by Alice Schroder and Buffett: The Making of an American Capitalist by Roger Lowenstein.

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.


Charlie Munger: The First $100,000 Is The Most Difficult

My Money Blog has partnered with CardRatings and may receive a commission from card issuers. Some or all of the card offers that appear on this site are from advertisers and may impact how and where card products appear on the site. MyMoneyBlog.com does not include all card companies or all available card offers. All opinions expressed are the author’s alone.

There used to be a series of ING commercials where people would carry around their “Number”, which was usually over a million dollars. I think such large numbers actually discourage most savers, so what if we had an alternative goal that was both more achievable yet realistic?

I’m currently reading a new book called Charlie Munger: The Complete Investor by Tren Griffin because, well, I like to read anything about Charlie Munger. There is a lot of good stuff related to investing inside, but it didn’t mention one of my favorite personal finance quotes from Mr. Munger. I can’t seem to find an exact reference anymore, so here are two paraphrased sources…

First, here is an excerpt from the 2003 book Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe (my review):

Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.

Second, here is another version of the quote credit to Munger, per Conservative Income Investor:

“The first $100,000 is a bitch, but you gotta do it. I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”

$100,000 is certainly a nice, round number. But is it a worthy goal? Consider these points:

Most people will never achieve $100k in portfolio assets. Forget a million bucks. Consider this chart from the Quartz article America is full of high-earning poor people. On average, even a person earning close to six figures will struggle to reach $100k in financial assets by age 55.

The figure below plots financial assets held by the upper middle class (household income from $50,000 to $75,000, and $75,000 to $100,000) aged 40 to 55. Financial assets are any assets a household owns that isn’t a house, car, or business, which means it includes all retirement funds.

networth100k

If you reach $100k quickly, that means you have high earning power. Let’s say you start a successful small business or are in a well-paid professional field. Well, you have the saving potential to reach the millionaire level, you just have to keep it by not increasing your spending accordingly.

If you reach $100k gradually, that means you have built up a strong habit of spending less than you earn. Let’s say it takes you a decade of steady saving to reach $100k. That’s okay, as you’ve shown that have both consistent earning power and spending restraint. You’ll be able to save another $100k over the next decade for sure, meanwhile your first $100k is going to keep on growing.

At the $100,000 level, compound interest become significant. At 5% return, your $100,000 will grow by $5,000 in just one year. That’s $5,000 for doing nothing but waiting around for a year. The year after that, you won’t just have another $5,000. You’ll have $5,250 due to compound interest. At the end of five years, that $100k is already $127,628.

Add in the additional money from your continuing habit of saving, and things start to improve quickly. Your snowball is growing. I no longer automatically reinvest my dividends from my taxable mutual fund and ETF holdings because I love seeing the money show up in my cash account. A few clicks and I’ll reinvest them, but I like the feeling of “cashing my dividend checks” and knowing that one day I’ll be waiting for them to arrive instead of my paycheck.

Now, I still think savings rate is a better measuring stick than portfolio size, because someone who can earn $60k and spend $30k every year is going to be able to retire much sooner than someone who earns $180k and is stuck in a lifestyle spending $150k. But if you are in the phase of your life where you love watching your account balances grow every day, even by a few dollars (been there, done that), $100k is the biggest goal you need.

Related: Munger: Work For Yourself An Hour Each Day and Munger on Parenting and Childhood.

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The Power of Compound Interest Shown in a Single Chart

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It’s not just how much you save, it’s when you save that matters. The best time to start is now. This is the power of compounding returns, which this single chart will help you visualize:

jpcompound

  • Susan (grey) invests $5,000 per year from age 25 to 35 ($50,000 over 10 years) and stops.
  • Bill (green) invests $5,000 per year from ages 35 to 65 ($150,000 over 30 years).
  • Chris (blue) invests $5,000 per year from ages 25 to 65 ($200,000 over 40 years).

You’ll note that Susan still ends up with more money than Bill, even though he invests three times as much money over 30 years, all because Bill starts late. Susan and Chris start out the same, except that Susan stops after 10 years while Chris keeps going. Chris only invests $100,000 more than Susan, but ends up with $500,000 more money in the end. A 7% annual return is assumed.

The chart is from a JP Morgan slide deck for their asset managers, via Business Insider.

I’m also reminded of Warren Buffett and his Snowball biography – “Life is like a snowball. The important thing is finding wet snow and a really long hill.”

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Charlie Munger on Teaching Character Values in Childhood

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I just started reading a biography of Charles Munger, Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe, originally published in 2000.

Charles Munger is best known as Warren Buffett’s long-time friend, business partner, and vice-Chairman of Berkshire Hathaway. I find him fascinating on many levels – as a thinker, investor, philanthropist, and even philosopher. One of my favorite tips from him is to Work For Yourself An Hour Each Day, something I found in Warren Buffett’s biography The Snowball.

Here’s a memorable quote from the book dealing with his childhood:

Like Warren Buffett, Munger inherited no wealth. […]

“While no real money came down, my family gave me a good education and a marvelous example of how people should behave, and in the end that was more valuable than money,” explained Munger. “Being surrounded by the right values from the beginning is an immense treasure. Warren had that. It even has a financial advantage.”

Right now, there is a lot of focus on teaching “financial literacy” – which is good – but if you’re a parent of young children I feel that you have to think differently. It’s not critical to give your kid some fancy allowance iPhone app or online savings account to teach them how to manage money. What you should really be conscious of is how you act around them. Positive character traits like self-discipline, being dependable (keeping your promises), and frugality (not being wasteful) are often best taught by example. Watching you and learning such traits will help them to avoid credit card debt more than showing them how APR works. If only I could just buy them a book or something. 😉

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Would Meeting Your Future Self Make You Save More?

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Behavioral economists are constantly trying to find ways to convince us do the “right” things like save for retirement. Why is it so hard to give up short-term perks for larger, long-term rewards? For example, take my True Cost of Holiday Shopping calculator and this Warren Buffett anecdote from a 2011 WSJ article:

Warren Buffett is one rare—and extreme—example. When he was a young man, according to Alice Schroeder’s biography “The Snowball,” Mr. Buffett often asked, “Do I really want to spend $300,000 for this haircut?” He was thinking about the vast amount of money he wouldn’t have decades in the future because of the small outlay he might make in the present.

I think it’s fair to say that most people don’t think like that. (It appears he did get haircuts at least once in a while.) According to Stanford researchers, one big reason is because we struggle to identify with our future selves. The researchers are quoted in this Wired article:

To people estranged from their future selves, saving is like a choice between spending money today or giving it to a stranger years from now.

In their study, they used advanced virtual reality goggles make some people see older versions of themselves. Afterwards, the test subjects who saw their elderly avatars stated they would save twice as much as those who didn’t. Merrill Edge, the brokerage arm of Bank of America, has created an online version of this aging process called Face Retirement. It takes your picture via webcam and ages your face to help you better visualize “old” you. I got to see myself at age 47 to 107, in 10-year increments.

Will it work? I’m not sure. My wife says I just look like a zombie, especially at 107. Maybe there would be more shock value if it showed me eating dog food or something.

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Warren Buffett Was Nearly Content With Early Retirement At 25

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snowball_bookHere is an insightful ForbesLife interview by Warren Buffett in their “When I was 25” series. The article is primarily about how he ended up starting the investing partnership that eventually became Berkshire Hathaway. But what I didn’t know was that before that happened, he actually was ready to settle down in early retirement when he was 25 years old, content to invest just his own money:

The thing is, when I got out of college, I had $9,800, but by the end of 1955, I was up to $127,000. I thought, I’ll go back to Omaha, take some college classes, and read a lot—I was going to retire! I figured we could live on $12,000 a year, and off my $127,000 asset base, I could easily make that. I told my wife, “Compound interest guarantees I’m going to get rich.” […]

I had no plans to start a partnership, or even have a job. I had no worries as long as I could operate on my own. I certainly did not want to sell securities to other people again.

Adjusting for inflation using CPI, $127,000 in 1955 would be about $1,100,000 in 2012 dollars. Spending $12,000 a year in 1955 would be just about $100,000 a year today. A 9% portfolio withdrawal rate is pretty high, but then again he’s Warren Buffett.

If he had gone the early retirement route, I’m sure he’d still be a comfortably rich Nebraska family man today, but given his quiet lifestyle we probably wouldn’t know anything about him. In fact, Buffett had already turned down an offer to be a partner in the hedge fund that Benjamin Graham founded. But events conspired to let him manage other people’s money without the pressures of salesmanship or marketing, and $50 billion later he’s one of the richest people alive.

I already knew from reading his biography The Snowball that he was quite the young entrepreneur and by 16 years old he had already accumulated over $58,000 in 2012 dollars ($5,000 in 1946). This was from many different micro-businesses including delivering newspapers, selling everything from gum to car washes, and owning pinball machines. He already knew that the faster he earned that money, the more time he would have to let compound interest do its thing. After moving back to Omaha, he even rented a house at first instead of buying so he wouldn’t have to commit any of his precious capital.

In any case, interesting that his initial goal was early retirement and career freedom, not necessarily doing whatever he could to accumulate more money. I look forward to the other articles in this series.

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MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.