Warren Buffett isn’t just one of the richest
persons on this planet, he is probably also the billionaire with the lowest expenses out there,
and he has kind of always been this way. He usually spends $3.17 on
breakfast at McDonald’s. If the market is down,
he’ll pick the cheaper option. He still lives in the same old house that he purchased
for just $31,500 more than 60 years ago. Heck, he even used to drive a car with
a license plate that read “THRIFTY”. At the same time though … In 1989 Warren Buffett’s company spent $6.7 million on
a personal jet airplane. In 1952 he bought a Dale Carnegie
speaking course, which turned out to be quite expensive
if you talk in terms of opportunity cost, but we’ll get to that later. Also in 1952, Buffett splurged 6% of his
then net worth on a wedding ring. He even calls his purchase of the wedding ring
“the best investment” he ever made. I’ve never bought a piece of
jewelry that I’ve regretted. Although Charlie Munger used to call
the jet airplane “The Indefensible”. Anyhow, it is clear that the Oracle of Omaha
thinks that sometimes, an investor must be willing to pay up
– even outside of the stock market. So that begs the question
– how frugal should an investor be? In this video – we will boil the topic of deferred
gratification down into three separate takeaways. This is the Swedish Investor, bringing you the best tips
and tools for reaching financial freedom, through stock market investing. First and foremost – let’s discuss why
frugality is important for the investor. Here’s how Warren Buffett
defines investing: “Investing is forgoing consumption now in order to
have the ability to consume more at a later date.” Buffett, who understood the wonders of
compounding early on, has always thought that every dollar today
might be ten dollars some other day. In Buffett’s case, that has proven to be
a modest assumption, and when you think about the mathematics of it,
expenses snowball really quickly. Given the stock market returns that
Buffett has had over the years, what do you think that the cost of that Dale Carnegie
course that he bought at age of 22, is in today’s terms? If he would have invested the money,
it would now be $291m. No, this is not a typo. This is compound interest at its fines, or worst, depending on how you view it. It may be a bit aggressive to expect that you and I will ever have the same
type of returns as the Oracle of Omaha, but let’s assume that we can make half of what
a young Buffett was able to perform. Then, what’s the opportunity cost of purchasing
a car when you are in your 20s? We’re not even talking a flashy car here, I mean basically
the cheapest model that you could get at current prices. If you would have invested the money it could have
purchased a much fancier car at the age of 30. At 40 you could have gotten
a whole house (yes, in cash). And when you turned 50, you would already
have reached financial freedom. Hadn’t you purchased that car, of course. Warren Buffett’s first rule of investing is
to never lose money. His second rule is to never
forget the first rule. Overspending is a guaranteed way of
breaking this rule, without even making a mistake
in the stock market. Also, it’s a guaranteed way of delaying the
date at which you will reach financial freedom. So compound interest and
its wonders is the reason why it’s a good idea to at least be somewhat
frugal. Most investors understand this, and that’s why it’s almost a bragging right within
our circles to talk about your high savings rate. I always believed in spending two or three cents
out of every dollar I earn and saving the rest. But how frugal should an investor be?
What is a reasonable savings rate? 10% of your income? 30%? More? This obviously
comes down to personal choices but let me help you to analyse your own situation by giving you
a few rules of thumb from Warren Buffett. Any money you save before you get out and start
having a family is probably - or any dollar is probably worth $10 later on simply because
you can save it. The time to save is young. The first rule of thumb, which was hinted at
before, is that the younger you are, the larger the financial
incentive to be frugal is. One of the biggest reasons to why Warren Buffett is
the richest investor out there, is because he started early. He bought his first stock when
he was just 11 years old and he managed to make and save a ton of
money already in his teens. The best day to start was probably yesterday, but today is
the second-best day, so do not feel discouraged. Secondly, well, it’s a personal choice
of how much you value a certain activity. Who’s to say whether it’s better to defer
a dollar of expenditure on your family on a trip to Disneyland or something that
they’ll get enormous enjoyment out of so that when you’re 75 you can have a, you
know, 30-foot boat instead of a 20-foot boat? In the intro of the video, we saw that
Buffett spent 6% of his net worth on a wedding ring in 1952 and calls it
the best investment of his lifetime. And you know that this man has
made a lot of great investments. Moreover, Buffett would never suggest that you
should be frugal or defensive when it comes to making purchases which are expected to return
much more for you somewhere down the line. Like he did when he spent 1% of his net worth on
a Dale Carnegie speaking course back in 1952, which would have been $291 million today,
had he invested the money. It might be difficult to imagine today, but Warren Buffett used to have
a ton of stage fright back in the days. He realized that this was going to set him back
a great deal in his quest for riches, so he decided to pay up to help him
in growing as a person. I bet that the $100 which he paid for
the course is at the top of the list of his greatest investments of all time, too. Thirdly, you can argue that how frugal
you are supposed to be depends on where we are
in the market cycle. And if you find that everything
is extremely cheap, like in ’74, you should put every available dime into
equities. And that’s what we’ve tried to do. Let’s pick the current situation
in the stock market as an example. The average 3-year earnings yield of the S&P500,
meaning how much the companies in that index has earned during the last 3 years compared
with what they currently cost, is 2.9%. As you can see from this graph, that is
lower than at any other time in history. In 2008 & 2009, for example, it was a much
greater time for penny-pinching for us investors. Why? Because we would have gotten
more than 2 times as much earnings from for going consumption
back then as we get now. Because of how expensive the stock market currently is,
yes, it is actually relatively more justified (I mean – less unjustified) to go out and splurge
on a Lamborghini right now, than it has ever been. That is not financial advice though, and
you should not forget about rule 1 and 2. I have everything in life I want. It’s a
very simple thing. If there’s anything that money can buy — there are things money can’t
buy, but if there’s anything money could buy that I wanted, I’d do it this afternoon. If I’m allowed to speculate
a little bit myself, I think Buffett’s ability to remain frugal,
even with the enormous sums of money which he has today,
comes down to two things: - His perception of his own self-worth is not
generated through a money-consuming activity; and - He does not have any expensive hobbies If you can combine those two for yourself, you’ll have
a much easier time reaching financial freedom I have, kind of accidentally,
implemented this in my life too. Spending money on … stuff doesn’t really help me in
increasing the reach of this YouTube channel, improving the performance of my portfolio,
or adding plates to the barbell. Also, neither YouTube, stock market investing, nor powerlifting are activities that require
a ton of money to practice as a hobby. - For us as investors, a dollar today is worth
a bunch of dollars in a few years - Save more when you are young and when you are
finding great investments in the stock market. However, some activities outside the market are
too valuable to be cheap with. - Stay frugal by trying to figure out a way to feed
your ego without flashing expensive items, and by avoiding expensive hobbies Cheers guys.
