Buffett's Tips: A Guide to Financial Literacy and Life

Buffett's Tips: A Guide to Financial Literacy and Life

by John M. Longo, Tyler J. Longo

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Overview

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.



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Product Details

ISBN-13: 9781119763918
Publisher: Wiley
Publication date: 12/22/2020
Pages: 432
Sales rank: 456,463
Product dimensions: 9.10(w) x 6.00(h) x 1.20(d)

About the Author

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.

Table of Contents

Preface xv

Acknowledgments xix

Chapter 1: Who is Warren Buffett? 1

Introduction 1

Buffett the Teen 2

Who Are We to Write This Book? 3

What is Financial Literacy and Why Does It Matter? 4

Some Fundamental Buffett “Tips” 5

Buffett’s Work Ethic 7

Buffett Has Spent a Lifetime Learning 8

Why is Buffett Happy? 10

Improve Your Communication Skills and See Your Lifetime Earnings Increase 50% 12

Acting with Integrity is the Right Thing to Do and Good for Business 13

Buy Low, Sell High 14

Buffett Doesn’t Succumb to Peer Pressure: The Inner Scorecard 15

Buffett’s Fallback Career—Comedian 17

Buffett’s Lasting Legacy: Philanthropy 18

Buffett’s Tips from Chapter 1 19

References 20

Chapter 2: Investment Fundamentals According to Buffett 23

Introduction 23

The “Miracle of Compound Interest” Explained 24

Trade-Offs: A Fundamental Principle of Life 27

The Saint Petersburg Paradox: A Lesson on Risk and Return 29

Risk and Return: The Evidence 30

Diversification: One of the Few Free Lunches in Life 32

Supply and Demand Determine Price 33

Summary on Financial Fundamentals 35

Buffett’s Tips from Chapter 2 36

References 36

Chapter 3: Bank Accounts, Debit Cards, Credit Cards, and Your Credit Score 38

Introduction 38

Insured Bank Deposits 38

Savings Accounts and Certificates of Deposit (CD) 40

Checking Accounts and Electronic Bill Payment 42

Parts of a Check 43

Balancing a Checkbook 44

Debit Cards and Automated Teller Machines (ATM) 45

Credit Cards and Charge Cards 46

Apps to Send Money: PayPal, Venmo, Zelle, Apple Pay, Android Pay, and so forth 49

Your Credit Score: A Report Card of Your Financial Responsibility 50

Personal Bankruptcy: Try to Avoid at all Costs 52

A Word on Bitcoin from Buffett 53

Buffett’s Tips from Chapter 3 56

References 56

Chapter 4: Bonds and Inflation 58

Introduction 58

US Savings Bonds 59

Other US Treasury Fixed Income Securities 60

Inflation and the Consumer Price Index (CPI) 62

Bond Ratings and Corporate Bankruptcy 63

Corporate Bonds, Municipal Bonds, and Bowie Bonds 65

Bowie Bonds and Other Asset-Backed Securities 66

The Federal Reserve: The Central Bank of the United States 67

What Determines Interest Rates? 69

Intuition on Estimating the Price of a Bond 70

So Are Bonds Good Investments? 72

A Note on Negative Bond Yields 73

Appendix: Bond Valuation 74

Buffett’s Tips from Chapter 4 75

References 75

Chapter 5: Stock Market Fundamentals 77

Introduction 77

Initial Public Offerings (IPOs): The Birth of a Stock 78

Investment Banks and Investment Bankers 78

The Main Event: The Stock Begins Trading on the Exchange 80

The Stock Exchange 81

A Sidebar on Stock and Mutual Fund Symbols 83

Dividends 84

Large Cap vs. Small Cap 87

Growth vs. Value 88

Domestic vs. International 90

An Index Fund: A Great “Set It and Forget It” Long-Run Investment 91

Beating the Market and the Efficient Market Hypothesis 92

Meet Mr. Market, the Manic-Depressive Stock Market 94

Buffett’s Tips from Chapter 5 96

Appendix: Selling Short (or the “Don’t Try This at Home” Area of Investing) 96

References 98

Chapter 6: Buffett’s Approach to Stocks 100

Introduction 100

Estimating the Value of a Stock 101

Getting a Price Target with the Discounted Cash Flow Model 101

Getting a Price Target with the Wall Street P/E Model 103

Buffett’s Approach to Stocks 105

Getting into the Buffett Mindset on Investing 105

Stay within Your Circle of Competence 106

The Importance of Being Patient 107

Good vs. Bad Companies and the Passage of Time 107

How Buffett Thinks About Change in an Industry 109

Types of Businesses Buffett Likes 110

Demonstrated Consistent Earnings Power 111

Look for Companies with Good Management 112

Buy Companies That Have the Power to Overcome Inflation 113

Focus on Firms with Favorable Long-Term Prospects 115

When to Sell 117

Summarizing Buffett’s Approach 118

Buffett’s Tips from Chapter 6 119

References 120

Chapter 7: Accounting Fundamentals: The Report Card for Businesses 122

Introduction 122

The Income Statement: A Company’s Report Card for One Period 124

Apple’s Income Statement 125

The Balance Sheet: A Picture of a Company’s Report Card Since Inception 129

Current Assets 131

Long-Term Assets 132

Liabilities 134

Current Liabilities 134

Long-Term Liabilities 134

Stockholders’ Equity 135

A Quick Note on the Statement of Cash Flows 137

Summary 138

Buffett’s Tips from Chapter 7 139

References 139

Chapter 8: Buffett’s Approach to Portfolio and Risk Management 141

Introduction 141

The Key to Selecting a Well-Diversified Portfolio: Correlation 142

A (Theoretical) Portfolio with No Risk 143

Selecting an Optimal Diversified Portfolio: The “Business School” Approach 144

Buffett’s First Approach to Portfolio Selection: Index Funds 147

Buffett’s Second Approach to Portfolio Selection: Expert Mode 147

A Compromise Solution to Portfolio Selection 149

How Many Stocks Make a Diversified Portfolio? 150

The “Business School” Approach to Risk 151

Buffett’s Critique of the Business School Approach to Risk 153

Buffett’s Approach to Risk 154

Buffett on Gold 155

Summarizing Buffett’s Views on Risk 157

Endnote on CAPM 157

Buffett’s Tips from Chapter 8 158

References 158

Chapter 9: Business 101: Companies You Should Know 160

Introduction 160

The Dow Jones Industrial Average: The Oldest Diversified US Stock Market Index 161

How the Dow is Calculated 162

An Explanation of Stock Splits 164

Different Share Classes and Buffett on Stock Splits 166

Current Stocks in the Dow Jones Industrial Average 167

Materials Stocks in the Dow 168

Chevron (NYSE: CVX) 168

Dow Chemical (NYSE: DOW) 168

Consumer and Business Services Stocks in the Dow 169

Home Depot (NYSE: HD) 169

McDonald’s (NYSE: MCD) 169

Walmart (NYSE: WMT) 170

Consumer Goods Stocks in the Dow 170

Apple (NASDAQ: AAPL) 171

Coca-Cola (NYSE: KO) 171

Nike (NYSE: NKE) 172

Procter & Gamble (NYSE: PG) 173

Walgreens Boots Alliance (NASDAQ: WBA) 173

Walt Disney (NYSE: DIS) 173

Financial Stocks in the Dow 173

American Express (NYSE: AXP) 174

Goldman Sachs (NYSE: GS) 174

JPMorgan Chase & Co. (NYSE: JPM) 174

Travelers (NYSE: TRV) 175

Visa (NYSE: V) 175

Health Care Stocks in the Dow 175

Amgen (NASDAQ: AMGN) 175

Johnson & Johnson (NYSE: JNJ) 176

Merck & Co. (NYSE: MRK) 176

UnitedHealth Group (NYSE: UNH) 176

Industrial Goods Stocks in the Dow 177

Boeing (NYSE: BA) 177

Caterpillar (NYSE: CAT) 177

Honeywell (NYSE: HON) 177

3M Company (NYSE: MMM) 178

Technology Stocks in the Dow 178

Intel (NASDAQ: INTC) 178

International Business Machines (NYSE: IBM) 179

Microsoft (NASDAQ: MSFT) 179

salesforce.com (NASDAQ: CRM) 180

Telecommunications Services Stocks in the Dow 180

Cisco Systems (NASDAQ: CSCO) 180

Verizon (NYSE: VZ) 181

Some Blue-Chip US Stocks That Aren’t in the Dow 181

The FANG Stocks—They Don’t Bite 181

China’s Emerging Titans 183

Some International Energy Titans 183

Some Global Consumer Titans 184

Some Global Financial Service Firms 185

Buffett’s Tips from Chapter 9 185

References 186

Chapter 10: Business 101—Past and Present Business Leaders, or Who’s Who in Business 187

Introduction 187

Past Business Leaders 188

Rose Blumkin (Mrs. B) 188

Andrew Carnegie 189

Walt Disney 189

Thomas Edison and Jack Welch 189

Henry Ford 190

Katharine Graham 190

William Randolph Hearst 190

Steve Jobs 191

Ingvar Kamprad 191

Ray Kroc 192

Estee Lauder 192

J.P. Morgan 192

John D. Rockefeller 193

Cornelius Vanderbilt 194

Sam Walton 194

Thomas Watson Jr. 195

Present Business Leaders 195

Bernard Arnault 196

Mary Barra 196

Jeff Bezos 197

Richard Branson 198

Michael Bloomberg 198

Sergey Brin, Larry Page, and Sundar Pichai 199

Shawn Carter, Beyoncé Knowles, Sean Combs, and Andre Young 200

Tim Cook 200

Jamie Dimon 201

Jack Dorsey 201

Bill Gates, Paul Allen, and Steve Ballmer 201

Reed Hastings 202

Kylie Jenner and Robyn Fenty 202

Phil Knight 203

Jack Ma, Pony Ma, and Robin Li 203

Rupert Murdoch 203

Elon Musk 204

Amancio Ortega 204

Howard Schultz 204

Oprah Winfrey 205

Mark Zuckerberg and Sheryl Sandberg 205

Buffett’s Tips from Chapter 10 206

References 206

Chapter 11: Being Thrifty like Buffett: Ways to Save Money 208

Introduction 208

Your Library: Free Books, Magazines, Newspapers, Music, Movies, and More 209

Free Educational Courses: Khan Academy, Coursera 211

Websites for Free Stuff 212

Free Activities 213

Amazon.com: The World’s Biggest Store 214

Comparison Shopper Tools: Your New Best Friend 215

Barter: Turning a Cell Phone into a Porsche Convertible 216

Eat a Low-Cost Meal, Periodically 217

Shop Private Label and Generic Items 219

Clothes: Outlet Stores, Vintage Items, and Buying Off-Season 220

Buying Gasoline 221

Coupons, Double-Couponing, Triple-Couponing, and Groupon 222

Rewards Programs 223

Negotiate with Cell Phone, Cable, and other Service Providers 224

Yard Sales, Flea Markets, and More: Turning Trash into Treasure 225

Do-It-Yourself 227

Donate Things to Charity 227

Avoid Shooting Yourself in the Foot with Bad Habits 228

Tying It All Together in a Budget 228

Buffett’s Tips from Chapter 11 232

Appendix: Sample Budget 232

References 233

Chapter 12: Buffett’s Views on Cars and Homes 235

Introduction 235

Do You Need a Car? 236

New Cars vs. Used Cars 237

Buying vs. Leasing a Car 239

The Best Time to Buy or Lease a Car 241

Home Basics 243

Finding A Home 244

Bidding for a Home 245

Paying for a Home: The Down Payment 246

Paying for a Home: The Mortgage 248

A “House Hack”: Getting Someone to Pay (Most of) Your Mortgage 250

Looking Under the Hood of a Mortgage 250

What Determines Home Prices? 254

Buffett’s Tips from Chapter 12 254

References 255

Chapter 13: Buffett on Dale Carnegie, Communication Skills, and Emotional Intelligence 257

Buffett Learns Life-Changing Skills in a Dale Carnegie Course 257

CliffsNotes Version on Dale Carnegie and How to Win Friends and Influence People 259

Things How to Win Friends and Influence People Will Do for You 260

Techniques in Handling People According to How to Win Friends and Influence People 261

Six Ways to Make People Like You According to How to Win Friends and Influence People 264

How to Win People to Your Way of Thinking, According to How to Win Friends and Influence People 266

What is Emotional Intelligence (EQ)? 269

Emotional Intelligence (EQ): Some Details 270

Have A Great Posse 274

Buffett’s Tips from Chapter 13 277

References 277

Chapter 14: Buffett’s Tips for College 280

Introduction 280

College: The Basics 281

Getting into a College 282

Graduate School: Optional for Some Jobs, Mandatory for Others 284

Paying for College: Scholarships and Grants 286

Paying for College: The Three-Year Plan for Super Achievers 287

Paying for College: 529 Plans 287

Paying for College: Student Loans 288

Paying for College: On- and Off-Campus Jobs 290

Your Resume: A Snapshot of Your Qualifications for a Job 291

Putting Together Your Resume 292

The Objective Section 292

The Education Section 293

The Work Experience Section 294

The Skills Section 295

The Activities and Interests Section 296

Cover Letter 297

Buffett’s Tips from Chapter 14 297

Appendix 298

References 299

Chapter 15: Buffett’s Tips for Careers 300

Introduction 300

LinkedIn Profile: Your Online Resume 300

Finding an Internship or Job 302

The Job Interview(s): Preparation 303

The Job Interview(s): Acing Your Interview 306

The Job Interview(s): Compensation, or Show Me the Money! 309

Succeeding on the Job 310

Financial Paperwork After Getting a Job 313

Forms W-2 and W-4 313

Form 1040: The Annual Income Tax Form and “The

Buffett Rule” 314

Retirement Plans 316

Becoming a 401(k) or IRA Millionaire 318

Buffett’s Tips from Chapter 15 319

Appendix 319

Health Benefits Information 319

References 322

Chapter 16: Buffett’s Tips for Philanthropy 324

Buffett’s Huge Gift and the Giving Pledge 324

Getting Involved in Philanthropic and Charitable Activities 327

Measuring Performance 329

Market-Based Economies Are Good . . . Unless You Wind Up as Roadkill 331

It’s Not All About the Benjamins 333

The Loss of Reputation Hurts More Than the Loss of Money 335

Inheritance Matters 337

Buffett’s Definition of Success 338

Buffett’s Tips from Chapter 16 339

Appendix 339

Charitable Lunch Auctions for Warren Buffett, Benefiting Glide Foundation 339

References 340

Glossary of Financial Terms in “Plain English” 343

Index 393

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