Grant Sabatier: The 7 Levels of Financial Freedom

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“It’s important to view money not as something that allows you to buy things, but view it as a means of giving you more choices in how you want to live.”

Grant Sabatier, the author of “Financial Freedom”, views money not as something that allows you to buy things, but as a means of giving you more choices in how you want to live. “With every dollar you save, you give yourself more freedom and options in life,” he said. “Based on how much you have saved and invested, ask yourself, ‘How many months of freedom have you acquired?’”

Sabatier’s 7 levels of financial freedom

Level 1: Clarity

The first step is taking stock of your financial situation — how much money you have, how much you owe, and what your goals are. “You can’t get to where you want to go without knowing where you’re starting from,” Sabatier says.

Level 2: Self-Sufficiency

Next, you’ll want to be standing on your own two feet, financially speaking. This means earning enough to cover your expenses without any outside help, such as contributions from Mom and Dad.

At this level, Sabatier notes, you may be living paycheck-to-paycheck or taking on loans to make ends meet.

Level 3: Breathing room

People at Level 3 have money left over after living expenses that they can put toward goals such as building an emergency fund and investing for retirement.

Escaping Level 2 means giving yourself some financial leeway, which Sabatier notes doesn’t necessarily mean making a much bigger salary. Indeed, 31% of working Americans making over $100,000 live paycheck-to-paycheck, according to MagnifyMoney.

“Just because you make a lot of money doesn’t mean you’re actually saving that money,” Sabatier says. “Most people in this country live through debt.”

Level 4: Stability

Those who reach Level 4 have paid down high interest rate debt, such as credit card debt, and have stashed away six months’ worth of living expenses in an emergency fund. Building up emergency savings helps ensure that your finances won’t be thrown off track by unexpected circumstances.

“At this level, you’re not worried if you lose your job or if you have to move to a different city,” Sabatier says.

When calculating how much you’d need to have saved, thinking about what your financial picture might look like understand exigent circumstances, rather then your regular, everyday expenses, financial experts say.

“If you have a job loss, you’d make some changes. You’d probably cut your gym membership and get rid of your subscriptions, for instance,” Christine Benz, director of personal finance and retirement planning at Morningstar, told Grow. “Think about the bare minimum you’d need to get by.”

Level 5: Flexibility

People at Level 5 have at least two years’ worth of living expenses saved. With those kinds of savings, Sabatier suggests, you have the ability to think about your money terms of the time it can buy you: “You could take a year off from your job if you wanted to.”

You needn’t carry all of this money in cash, Sabatier notes: It could be a sum total from your savings and investment accounts. As long as you’re able to access that money somehow, if you need it, you have the flexibility to untether yourself, at least temporarily, from the workforce.

Level 6: Financial Independence

People who have achieved financial independence can live solely off the income generated from their investments, according to Sabatier’s framework.

“You generally have one of two things,” says Sabatier. “You either have a large pile of money in an investment portfolio that’s generating interest, or you have rental properties, and cashflow from the rent covers your living expenses, or a hybrid of the two.”

To get here, you’ll have to invest a high percentage of your income, which could require you to shift to a more modest lifestyle to drastically lower your cost of living. Pursuing this lifestyle requires a change in thinking away from the traditional paradigms of personal finance, Sabatier says.

“People are being taught to save 5%, 10%, 15% of their income, and maybe you’ll be able to retire when you’re 65,” he says. “Thankfully, more young people are starting to understand that if I aggressively save and invest, I can work less and have more control over my future and my destiny.”

Level 7: Abundant Wealth

Financially independent folks who live off their portfolio income rely on the “4% rule” — a retirement rule of thumb that posits that an investor can safely withdraw 4%, adjusted for inflation, from a balanced portfolio of stocks and bonds each year, and be relatively certain that the money will continue to grow and won’t run out.

Although economists debate whether 4% is the optimal number (some more conservative observers think the right figure might be closer to 3.3%), the calculation behind it serves as the basis for establishing a FIRE number — the amount of money you’d need to retire and earn an annual income you could comfortably live on.

While those in Level 6 need to monitor swings in their portfolio to make sure their retirement is still going according to plan, those in Level 7 have no such worries. “Level 7 is abundant wealth — having more money than you’ll ever need,” Sabatier says. “You don’t have to worry about money, and it’s not essential to your day-to-day existence.”

References:

  1. https://grow.acorns.com/self-made-millionaire-grant-sabatier-levels-of-financial-freedom/
  2. https://www.cnbc.com/2022/05/10/the-7-levels-of-financial-freedom-according-to-a-millionaire-50percent-of-us-workers-are-at-level-2.html

Ten Critical Investing Lessons

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Investing in assets is a great way to grow your money or to put your capital to work.

If there’s any lessons investors relearned in 2022, when investing in stocks, bonds, derivatives and real estate, it’s that the markets will be unpredictable, defy logic and offer unexpected surprises.

Sometimes investors can correctly anticipate what’s coming based on our past investing experience and macro economic information. Other times, investors are reminded no matter what they thought they knew, the market always knows better.

For these reasons, it’s important to remember you can always become a better, more patient and disciplined investor, whether you’re learning lessons the hard way, reminded of lessons you previously learned, but forgot, or learning from the good or bad experiences of others.

Here are 10 Critical investing lessons you wish you could teach your younger, novice self:

1) Personal finances first – Master and manage your personal finances first and foremost. Dealing with volatility is never easy, but it’s so much easier when your personal finances are rock-solid (no bad or debilitating debt, positive cash flow and net worth, emergency fund established). Know and strengthen your personal balance and cash flow statements. And, always have some cash on hand to take advantage of market dips and pullbacks.

2) Expect to be wrong often when investing – You’re going to be wrong when investing. You’re going to be wrong a lot. Your goal isn’t to bat 1.000 (that’s impossible). Your goal is to increase your odds of success. Even the best investors are wrong approximately 2 out of 5 times.

3) Sell slow – Don’t be in a rush to sell – It’s tempting to book a profit quickly or sell when you get scared. One investor sold MSFT at $24. Current price: $268. Selling a mega-winner early is the most expensive investing mistake you can or will make. And, don’t forget about taxes when you earn income or sell assets. Any income (or profit) you earn from selling assets is taxable. Before you sell any appreciated asset or take any income, make sure you have enough money for the taxes so that your gains will not be wiped out by taxes alone.

4) Watch the business – Watch the business, not the stock. The two are not linked at all in the short-term. But are 100% linked in the long-term. Always remember, you’re buying a piece of a business, do understand the business and how that business generates cash flow.

5) Buy quality – Capital is precious. Making money and putting money to work for you are hard. Saving it and growing it are harder. Buy the highest-quality investments you can find. Avoid everything else. When you focus on buying quality, opportunities can be found in any market whether it be up (bull) or down (bear). Thus, stick to your long-term plan of buying quality companies every month and forget about how everybody else is performing.

6) Add to winners, not losers – Add more capital to your winners, not your losers. “Winners” means the business is executing. “Losers” means the business isn’t. Add to the best companies you can find at better and better value points.

7) Patience above all – Your biggest edge and investing super power is patience. Don’t waste it. Compounding over the long term is the greatest power of investing. Your holding period for an investment asset should be measured is in decades, not days.

8) Do nothing is usually correct – “Do nothing” (being a long term investor) sounds easy, until you start investing your capital. Investing should be more like watching paint dry than a Las Vegas casino. More often than not, it’s the correct thing to do. Ninety-nine percent of good investing is doing nothing. It’s essential to ignore the noise and the hysteria of Mr. Market. Never Let Short-Term Volatility Dictate Your Long-Term Investment Decisions.

9) Learn valuation – Know what valuation metrics matter and when they matter. P/E Ratio is great, but it’s not universally applicable, and it only works when a company is in mature (stage 4). Consider ROIC, P/FCF, and P/Sales. Remember: Every investment is the present value of all future cash flow.

10) Network with others – Connect with other trusted long-term investors and experts. A good community is worth its weight in gold. Especially when bear markets appear.

Final thought: Have a plan – A financial plan is paramount to your financial success. During periods of volatility, you often hear that investors should “stay the course”, but there is not a course to stay without having a comprehensive financial plan.

The plan should be based upon your goals, values, purpose and dreams for the future, short and long term. It is a roadmap for your financial future and it should provide a guide for how you invest. The plan should also address other areas such as retirement planning, estate planning, risk management, asset allocation review, and cash flow planning.

In all things, be grateful! Appreciate and be grateful for all aspects for your current life and the abundance of opportunities. Gratitude influences your state of mind, your behavior, your relationships and your perspective on the world.

Roman philosopher Cicero said that, “Gratitude is not only the greatest of the virtues but the parent of all the others.”

Source: Brian Feroldi, 10 Critical Investing Lessons, Twitter, June 25, 2022.

The Power of “I Am”

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Self-talk, which is also known as your inner voice, are the words and messages you repeatedly say to yourself. These words, whether they are positive or negative, strongly influence how you feel and act in your daily life.

Self talk directly and substantially influences the way you think, behave and feel. Therefore, it’s important to use positive, motivating words that are structured to help you live your best life. For example, some people say destructive and disparaging comments to and about themselves that they would never say to someone else.

What follows the two simple words, “I Am”, will determine what type of life you have and will either bring success or failure in your life, says Pastor Joel Osteen.

Instead of saying negative “I Ams”, – “I am a failure. I am never going to succeed”, say what God says you are. Declare “I am blessed, confident, loved, accepted.”

When you change your “I Ams,” your life will change for the better. The seeds of greatness on the inside will spring forth.

10 Tips to become physically/mentally/emotionally stronger:

  1. Workout and move every day, eat healthier and get adequate sleep
  2. Meditate every day and strive to live a purpose driven life
  3. Accept new challenges or try something new…keep growing.
  4. Take some time to reflect and to be mindful…and spend time reading everyday
  5. Develop positive self-talk (affirmations) and stop negative self-talk
  6. Get comfortable with and learn from rejection and failure
  7. Have a gratitude attitude daily and keep a gratitude journal
  8. Be kind to yourself and others
  9. Stop comparing yourself to others
  10. Surround yourself with positive people

References:

  1. https://www.joelosteen.com/how-to-watch/Messages/2018/04/09/20/26/The%20Power%20of%20I%20Am
  2. https://positivewordsresearch.com/thoughts-matter/

Older Americans Have Not Saved for Retirement

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Nearly one-third of older Americans have less than $10,000 saved for retirement.

Almost three in 10 older Americans between 55 and 67 years old have less than $10,000 saved for retirement, according to a new survey from Sagewell Financial, a banking and financial technology company focused on seniors’ money management.

Whereas, four in 10 older Americans had less than $50,000 saved for retirement. 

Paying for retirement by older Americans

The Sagewell Senior Certainty Survey of older Americans revealed:

  • 27% have less than $10K saved for retirement, and 40% have less than $50K
  • 57% are concerned that they will run out of money
  • 82% do not feel confident about their access to cash or liquidity in retirement
  • 73% said they welcome some income smoothing (receiving consistent income in the form of 1 or 2 consolidated monthly checks.)

“It is disheartening to learn that more than a quarter of Baby Boomers have less than $10K saved for retirement – that number jumps to 32% among women,” said Sam Zimmerman, co-founder and CEO of Sagewell. “Nearly 60% of seniors expect to live on less than $3K a month in retirement. We are at a crisis point now, and it will worsen unless we take drastic steps to improve the way our seniors plan for and live in retirement.”

Inflation and Recession

Older Americans are being hit hard by soaring inflation, painfully high gas prices, and fear of a looming recession which has outpaced increases in their benefits this year. These challenges have many older Americans worrying about their financial security and future. 

“If you have inflation and a recession combined together, it’s a whole different beast,” said Zimmerman. “This is a time for action. The quicker you move, the more agency you have in reducing the impact of a recession.”

Given the darkening forecast, it’s not too soon to plan ahead and prepare for a possible recession.

First, don’t do this

While there are money moves you can take to help ride out a downturn, that generally shouldn’t include bailing out of the stock market.  

“The worst thing people can do is they get nervous and pull money out the market,” said Jordan Rippy, a personal finance expert and accounting professor at Johns Hopkins Carey Business School. “Most people should be invested in the market for the long term.” 

Cut your budget

Instead, look for ways to trim your monthly budget. That can mean culling things like subscriptions and streaming services, while also negotiating discounts on your cable, cell phone and other bills. 

Pay off your debt 

It’s expensive to carry debt in an inflationary environment. In particular, you want to pay off credit card debt — or any kind of debt with a variable interest rate — right away. That’s because those interest rates will rise and add more debt. 

Keep contributing to your 401(k)

Do not press pause on saving for retirement. Indeed, if possible keep stashing the same fixed percentage of your income in your 401(k) or other retirement savings plan. Even if the market is volatile your assets will grow over time if you don’t try to time the market. 

This approach, known as dollar-cost averaging, ensures that people look past the usual dizzying swings in the stock market and keep building their nest egg.

Create new revenue streams

Try to diversify your income sources so that if your company downsizes and you lose your job, you’ll still have money coming in.

The Sagewell Senior Certainty Index is an online, random sample survey of 1,004 Americans between 55 – 67 who are approaching retirement or recently retired. The survey was conducted to gauge how seniors, particularly those who are online, view the certainty of their retirement planning. 

References:

  1. Jeff H, (June 21, 2022), Sagewell Senior Certainty Index, https://www.msn.com/en-us/money/retirement/nearly-one-third-of-older-americans-have-less-than-2410000-saved-for-retirement/ar-AAYHJVK
  2. https://www.sagewellfinancial.com/sagewell-senior-certainty-index-june-2022/
  3. https://www.cbsnews.com/news/inflation-recession-saving-money-tips-gas-how-to-prepare-financially/

Failure is Always an Option

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“Failure is an option here. If things are not failing, you are not innovating enough.” ~ Elon Musk

Most people are afraid of failure. Yet, there is nothing new about failure, and it’s nothing to be ashamed of either. No one wants to fail at what they do, especially if it’s something they’re very invested in.

Elon Musk has a very simple way of not letting the prospect of failure get in his way, according to Jenny Medeiros at Goalcast. He doesn’t avoid failure or hope that it doesn’t happen, instead, he anticipates that it will occur.

Getting comfortable with the idea of failing isn’t easy. But there are steps, according to Medeiros, you can take to create a well-thought contingency plan when failure happens.

  1. Take a pen and paper right and write down a project you’ve always been meaning to start but haven’t due to the fear of not being successful.
  2. Now, write down the absolute worst-case scenario for that project. It could be losing money, wasting time, public embarrassment, etc.
  3. Next, break down the causes of this worst-case scenario. Then cross out the ones that are out of your control.
  4. Finally, write a contingency plan for each cause you can control. If you’re worried that no one will want to buy your designer socks, your plan could be to re-use those designs on other products like t-shirts or even notebooks.

The important thing here is to always expect and be willing to embrace failure, and be ready for it. Only then will it stop being the reason you don’t move forward with your goals.

Surrendering to failure is never the answer. Instead, learning from your mistakes is the best gift you can give yourself to improve not only whatever new invention, business venture or dream you undertake, but to evolve as individual, leader and innovator.

Musk learned from his own mistakes. He says:

“Constantly think about how you could be doing things better and questioning yourself.”

“The biggest lesson you can learn from Musk is to never, ever give up on your goals,” writes Bonnie Burton in an Inc Magazine article. “Life has a pesky way of placing big obstacles in your path — whether it be unmotivated employees, health emergencies, failed experiments, impostor syndrome and so many more unexpected roadblocks.”

References:

  1. https://www.goalcast.com/elon-musks-1-tactic-to-never-be-afraid-of-failure/
  2. https://www.inc.com/bonnie-burton/a-big-lesson-new-inventors-can-learn-from-elon-musks-mistakes.html

More Americans are Living Paycheck to Paycheck

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58% of Americans are living paycheck to paycheck after inflation spike — including 30% of those earning $250,000 or more. CNBC

With inflation at 40-year highs, workers across all income levels are having a harder time making ends meet. As one CNBC financial guru once commented, “Too many Americans are left with more month than money.”

As of May 2022, with inflation driving up costs everywhere for consumers in all income brackets, 58% of Americans — roughly 150 million adults — live paycheck to paycheck, according to a new LendingClub report. That’s down slightly from 61% who reported living paycheck to paycheck in April but up from 54% in May 2021.

Consumers are struggling to afford their day-to-day lifestyle and tend to rely more on credit cards and carry higher monthly balances making them financially vulnerable.

This increase means approximately three in five U.S. consumers devote nearly all their salaries to expenses with little to nothing left over at the end of the month.

Those struggling to afford their day-to-day lifestyle tend to rely more on credit cards and carry a higher monthly balance, making them financially vulnerable, the survey said.

Overall, credit card balances rose year over year, reaching $841 billion in the first three months of 2022, according to a separate report from the Federal Reserve Bank of New York.

References:

  1. Jessica Dickler, “58% of Americans are living paycheck to paycheck after inflation spike — including 30% of those earning $250,000 or more”, CNBC Personal Finance, June 27, 2022, https://www.cnbc.com/2022/06/27/more-than-half-of-americans-live-paycheck-to-paycheck-amid-inflation.html
  2. https://www.pymnts.com/consumer-finance/2022/report-36-of-consumers-earning-250k-now-live-paycheck-to-paycheck/

Debt is Bad

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If you make the monthly minimum payment on your 14% interest rate credit card balance, it will take 25 years to payoff this debt and you will pay in interest charges more than the original amount.

You should always pay more than the minimum payment due on your credit cards, student loans and other consumer debt. As your credit card debt balance decreases, your minimum payment due will decrease and your payments will stretch out. If you make the monthly minimum payment on your 14% interest rate credit card balance, it will take 25 years to payoff this debt and you will pay in interest charges more than the original amount.

There are amazing benefits to climbing out of credit card and student loan debt. Paying off debt takes a plan and patience to execute it.

  1. Figure out how much debt you owe. You cannot make a plan to pay off your debt until you know exactly how much you owe.
  2. Decide what to payoff first. Best option is to pay all the minimums, but pay more money on the card with the highest APR. The “snowball” method is the most efficient approach. It’s essential for you to get started.
  3. Negotiate down the APR. call the credit card company and ask for a lower APR. if successful, you can save a significant amount of money.
  4. Decide where the money to pay off your credit card will come from, like balance transfer (a band aid for a larger problem, your spending habits), 401(k) or home equity one of credit (HELOC), or reducing spending to prioritize debt reduction.
  5. Get started. The goal is action, not paralysis by analysis. Get started executing your plan and you can always find tune it later.

Being in debt means giving up choices and having reduced options; it means staying at a job you hate because it pays good money; it means not being able to build a decent savings account. It means delaying or foregoing implementing your plan to achieve financial freedom.

“Good debt is a powerful tool. But bad debt can kill you.” ~ Robert Kiyosaki

Debt can be a tool, as long as it is used to buy assets. And, statistically speaking, debt in America is normal. Only 50 percent of households reported any credit card debt, while credit card companies reported that 76 percent of households owed them money,” wrote Binyamin Appelbaum of the NYT

Seventy-five percent of Americans claim that they don’t make major purchases on their credit cards unless they can pay it off when the balance is due. Yet when looking at data of actual spending behavior, over seventy percent (70%) of Americans carry a balance.

It appears most people have no idea how much they actually owe or have any idea what their debt payoff date is.

Most people don’t get into serious credit card debt overnight. Instead, they accumulate debt little by little overtime until they realize they’ve got a serious debt problem.

Getting rid of credit card and student loan debts is hard, but very necessary to build wealth and achieve financial freedom.

Without a debt management plan, that requires knowing both the amount of debt you owe and the projected payoff date, you will more than likely be controlled by your debts.

The good news is that credit card and student loan debts are almost always manageable if you have a plan and take discipline steps to control and reduce it. You have to plan and take action paying off you credit card and student loan debts.

The number one mistake people make with their credit cards is carry a balance, or not paying it off every month. Since the key to utilizing credit cards effectively is to pay off the balance in full every month.

It is difficult for someone to achieve financial freedom if they always owe and have excessive debt.

Use credit only to purchase things of lasting value: a home, an education, maybe a car. Pay cash for everything else. To quote Knight Kiplinger, “Do you know anyone who got into big financial trouble because they didn’t borrow enough money?”

Once you’re out of the debt hole, you can avoid that predicament again, explains bankrate.com. Here are some rules to live by:

  • Set a budget and stick to it. Live within your means.
  • Avoid impulse purchases.
  • Shop around for the lowest price before making a big purchase.
  • If you use a credit card, pay off the balance each month to avoid interest charges.
  • Keep your finances organized and keep a close eye on your bank balances.
  • Stay away from “buy now, pay later” and “interest-free financing” offers, which just defer your debt.
  • Save money. Try to set aside a certain percentage of your income to be swept into savings.

References:

  1. https://www.bankrate.com/personal-finance/debt/debt-consolidation-options/

Thoughts of the Day

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Gratitude is a Super Power!

Gratitude is a choice, not just a feeling. You must choose to live a life in gratitude and therefore gratitude is an attitude and virtue. Gratitude is a virtue you choose to live your life by.

“Gratitude is not only the greatest of all virtues but the parent of all the others.” Cicero (106-43bc), Roman Philosopher

Angeles Arrien wrote: “The practice of offering gratitude bestows many benefits. Anger, arrogance, and jealousy melt in its embrace. Fear and defensiveness dissolve. Gratitude diminishes barriers to love and evokes happiness, keeping alive what has meaning for us.”

Gratitude is recognizing the fact that everything good that happens in your life is a gift. Not something we’re entitled to, or should expect, but actually a very sweet gift.

“The more you praise and celebrate your life, the more there is in life to celebrate.” – Oprah Winfrey

“Acknowledging the good that you already have in your life is the foundation for all abundance.” ~Eckart Toll

“Success is the sum of small efforts repeated day in and day out.”– Robert Collier

“Destiny is not a matter of chance, it is a matter of choice. It is not a thing to be waited for, it is a thing to be achieved.” -William Jennings Bryan

“Minimalism isn’t about removing the things you love. It’s about removing the things that distract you from the things you love.” ~Joshua Becker Over

“In every season of our life, we’re tempted to focus on our present burdens and miss the opportunities and blessings.

We love it when we receive the blessing, the promotion, the new house, the baby, but with the blessing comes new burdens, responsibilities, payments, cares.

Rather than enjoy where we are on the way to where we’re going, we get so caught up in the challenges that we miss the beauty of this moment.

You could be in one of the best seasons of your life, but you don’t realize it because you’re focused on the struggles, on what you don’t like, on what’s taking so long.

At some point you have to put your foot down and say, “This is the day the Lord has made”, and I will not allow my burdens to steal my joy, my peace and my enjoyment of my blessings.

Change your perspective and attitude. Shift your focus from life’s burdens to the blessings and opportunities, from what’s wrong to what’s right, from what you don’t have to what you have.

Make the most of abundant joy and peace every day.

“Being grateful all the time isn’t easy. But it’s when you least feel thankful that you are most in need of what gratitude can give you: perspective. Gratitude can transform any situation. It alters your vibration, moving you from negative energy to positive. It’s the quickest, easiest most powerful way to effect change in your life — this I know for sure.” ~ Oprah Winfrey

References:

  1. https://www.joelosteen.com/en-US/inspiration/todays-word/2021/03/21/20/06/Todays%20Blessings

Warren Buffett’s Three Investing Principles

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If you want to invest on your own, billionaire investor Warren Buffett recommends three investing principles that have guided him over the decades.

The principles are derived from a book first published in 1949: “The Intelligent Investor”, written by Buffett’s mentor, Benjamin Graham:

Principle 1: Don’t look at a stock like it is a ticker symbol with a price that goes up and down on a chart. It’s a slice of a company’s profits far into the future, and that’s how they need to be evaluated.

Buffett has four things he wants to see, whether he’s buying the entire company for Berkshire, or just a slice of it as a stock:

  1. “One that we can understand …” When Buffett talks about “understanding” a company, he means he understands how that company will be able to make money far into the future. He’s often said he didn’t buy shares of what turned out to be very successful tech companies like Google and Microsoft because he didn’t understand them.
  2. “With favorable long-term prospects …” Buffett often refers to a company’s sustainable competitive advantage, something he calls a “moat.” A “moat” consists of things a company does to keep and gain loyal customers, such as low prices, quality products, proprietary technology, and, often, a well- known brand built through years of advertising, such as Coca-Cola. An established company in an industry that has large start-up costs that deter would be competitors can also have a moat.
  3. “Operated by honest and competent people …”. “Generally, we like people who are candid. We can usually tell when somebody’s dancing around something, or where their — when the reports are essentially a little dishonest, or biased, or something. And it’s just a lot easier to operate with people that are candid. “And we like people who are smart, you know. I don’t mean geniuses… And we like people who are focused on the business.” — 1995 BERKSHIRE ANNUAL MEETING. The quality of the business itself, however, takes precedence.
  4. “Available at a very attractive price.”Buffett’s goal is to buy when the price is below a company’s “intrinsic value.”“The intrinsic value of any business, if you could foresee the future perfectly, is the present value of all cash that will be ever distributed for that business between now and judgment day.“And we’re not perfect at estimating that, obviously”, Buffett stated. “But that’s what an investment or a business is all about. You put money in, and you take money out.”

Principle 2: The stock market is there to serve you, not instruct you.

Many non-professional investors become concerned when stock prices fall. They think the market is telling them they made a mistake. Some may even be so shaken that they sell stocks at the lower prices.

Buffett takes the opposite view. If he buys a stock because he thinks the company will be a long-term winner, he doesn’t let the market convince him otherwise.

Principle 3: Maintain a margin of safety

“We try not to do anything difficult …

“This is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive.

“That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly.

“So, we look for one-foot bars to step over rather than seven-foot or eight-foot bars to try and set some Olympic record by jumping over. And it’s very nice, because you get paid just as well for the one-foot bars.” — 1998 BERKSHIRE ANNUAL MEETING

Low cost index funds

Buffett has long recommended that investors put their money in low-cost index funds, which hold every stock in an index, making them automatically diversified. The S&P 500, for example, includes big-name companies like Apple, Coca-Cola and Amazon.

Buffett said that for people looking to build wealth and their retirement savings, diversified index funds make “the most sense practically all of the time.”

“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.”

References:

  1. https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2022/03/22/bwp22links.pdf
  2. https://www.cnbc.com/2022/05/02/warren-buffett-says-investing-is-a-simple-game.html