4 stingy habits of Warren Buffet that can help you build your wealth | by Jason Huynh | April 2022

VALUE INVESTMENT

Or to avoid poverty

Warren Buffet and Charlie Munger are my heroes. They’re doing pretty well financially, admitting they have flirty jobs and are so miserly that their children regularly complain about it.

For example, Warren Buffet cites his daughter being embarrassed by the car he drives and his son says Berkshire Hathaway directors are paid much less than other company boards.

I read some of their material and realized that some of their daily habits contributed to their wealth.

I believe that if we use some of their habits, we will not necessarily be billionaires, but they should help us not to fall into poverty.

Allow me to share my findings with you.

There is a story that Warren Buffet once paid for Bill Gate’s lunch using McDonald’s coupons. You can’t be more economical at lunch than paying with coupons – well, you could ask your parents to cook for you, it’s probably even more economical.

But this habit is not about paying with coupons; it’s more about paying the least for things, regardless of the payment method.

Investing means paying for stocks at what you think is a low price or with a good margin of safety. An analogy would be like rather than paying $1000 for a new phone, you are actually paying $500 on that phone because the seller is offering a 50% discount. You can still sell the phone for $1,000 if you decide to sell it elsewhere.

For businesses, this means always being prepared to negotiate or haggle over the price. Like investing, as long as you know how much something is worth, you can always ask for a reasonable discount.

For our day-to-day life, it just means always getting the best things you can at the cheapest price. This does not mean that you always go for the cheapest item, but rather that you buy the items you like at the cheapest price. For example, I like McDonald’s Quarter Pounds. They’re not exactly healthy but I like the taste. But you wouldn’t see me going to Maccas (what we Australians colloquially call McDonalds) to buy the burger at full price.

No no no.

I will wait until the Maccas app has a 2 for 1 deal on the burger before buying it. Personally, I find that things always taste better when you get them at a bargain price.

If you ever read the essays of Warren Buffet, he will tell you that he will own a business that is expected to last the next 100 years and he will own it forever. There are potentially two reasons for this:

• First, you cannot predict how much a stock’s price will rise in the long term.
• Second, you pay capital gains tax every time you sell your shares at a profit.

The first is unpredictable, but the second is predictable and capital gains tax can be avoided by not selling at all.

In general, a company’s earning power will increase over time, and usually so will the stock price. This could be due to the company’s superior operations, but it could also simply be due to inflation.

So what miserly habit can we learn from this?

When you buy something, expect you to use it for a long time. It might surprise you that when you buy a new phone every year, even though you sold your old phone to buy the new one, you are actually making a loss.

For example, let’s say you buy a phone for $200, but the next model comes out the following year for a price of $220. You sell your current phone for $150, but you still have to shell out another $70 to buy the new phone. So you lost $70 in one year. Do this for, say, the next 4 years, and you’ve shelled out $280 of your own money just to keep up with the Joneses.

Here is an approximate Excel table.

Instead, let’s say you keep your phone at $200 for the next four years and only throw it away at the end of the fifth, then you would only have lost $200. As you can see, you’ve saved $80 ($280 – $200), even though you wouldn’t have the pleasure of getting a new phone every year.

Obviously, this scenario is different for everyone, but the truth is that if you hold something for a long time, you are less likely to lose money in the long run.

Charlie tells in Poor Charlie’s Almanac that his children have always complained about him because rather than taking the plane, he will force them to take the bus. Charlie was already rich when his kids started complaining about him even before he became a wealthy investor, he was already a well-to-do lawyer.

Likewise, there is a story that Warren Buffet liked to drive an old Cadillac until his daughter mentioned the car was embarrassing and then he bought a new but cheap one.

This miserly habit is to buy in a practical and not ostentatious way. Simply, if you needed a car to get to work, go for the beat-up Accord over the Lamborghini. Both will get you to the same destination assuming it’s only a few miles from home, and the Accord is much cheaper than the Lambo.

Let’s think about it in terms of investment. You have two companies. One sells for $4 per share and drops to $8 per share after a year. Another sells at the same time $20 a share and then resells a year later at $30. The caveat is that the first company is a low-key utility company while the second is a high-flying technology company.

In terms of earnings, you earned more with the first company (8/4 = 2x multiplier) compared to the second company (30/20 = 1.5x multiplier). You could argue that the tech company’s price could rise further, but that’s in the realm of the unknown. According to the data, if you want to multiply your money, go for the one with the highest chance of success and the cheapest.

The company has a use for my money; I do not. -Warren Buffett

This one is perhaps the meanest of them all. Give away most of your wealth and be stingy with yourself.

Now, what is the benefit of being generous with others and stingy with yourself. Simply, the more you want to give, the more careful you are not to be frivolous with money.

This is called public engagement and accountability.

If you commit to donating your income to a charitable cause, you will not waste the money you have, which will avoid damaging your reputation. This assumes you are not a gambling addict.

Another way to see it. If you try to keep all your money and possessions to yourself, you can never part with your money for a good potential return on your investment.

You will be too scared.

Also, if your goal is only to keep money for yourself, your goal is pretty meaningless. Building wealth to give to others will give you more meaning in life because it will make you a more persistent and motivated investor and businessman. Some people might call it hope, and it’s a very strong motivation.