Personal Finance Blog by Debit versus Credit

Buffett’s Buying - But Should You?

October 20, 2008 | Filed in: Investing | 1 comment

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If you read any financial news at all, then you’re likely to have read about Warren Buffett, the “Oracle of Omaha” and his proclamation to the world that he’s buying stocks.  A would-be investor would naturally assume that if Warren Buffett (who has made his fortune from the stock market) is buying then now is a great time as any to buy themselves.  However this logic is flawed, on the basis that what’s best for Buffett may not be best for you.  Let’s take a quick look at the facts.

Warren Buffett is extraordinarily wealthy

The point here is that Mr. Buffett can afford to take risks that some of us may not be able to take.  He’s wealthy beyond most of our imaginations and if he loses half of his fortune by taking chances in the stock market he’ll still be wealthy beyond our imaginations.  With a net worth of $62 billion (as reported by Forbes in March of 2008) he’s got plenty of room to take risks.  We however may not be so wealthy and may not be able to handle losing all of our cash is poor investments.

Warren Buffett admits that near-term we’re going to see more pain

While I’m no believer in market timing (it just can’t be done without some degree of luck) it’s still important to remember that we’re likely to see more pain in the economy over the coming months.  With this being the case we may still see more fallout on the markets.  Things will eventually get better, but in the meantime it might not be quite the best time to throw all of your money into the market.

Being greedy has always worked for Warren Buffett

Moving away from playing the devil’s advocate I want to point out that Warren Buffett is, in fact, the richest man in the world.  He has gained his fortune from investing in companies and he is likely to continue to increase his wealth. He has a rule for investing in companies, which I’ll quote for you now…

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful

This rule has played out well for Mr. Buffett over the years.  If there has ever been a time when people are fearful it is now.  Thus if you are willing to follow the mantra of the Oracle of Omaha you may do well for yourself over the long-term.

Follow these rules, and you’ll be okay

We absolutely have to pay attention to what others are doing when it comes to investing, but more importantly we need to pay attention to our own personal needs.  The question is “should I buy?” and the answer is that I just don’t know.  It’s going to be a personal choice based on hundreds of variables.  I can’t answer that question for you, but I can help you answer it yourself.  Based on what we’ve learned from Warren Buffett’s behavior we can formulate a simple list of reasons why investing now may or may not be in your best interests.

• Don’t invest anything that you can’t afford to lose
• To lower your risk it might be best to invest smaller amounts over a long period of time
• Diversifying your portfolio can help you to avoid unnecessary risk
• Being greedy has worked for Warren Buffett… can you make it work for you?

Be careful out there.  Don’t risk more than you can afford to lose, but please do take advantage of this fantastic opportunity to invest in great companies that will still be around after all of this mess has blown over.  You’ll be much wealthier for it in the future!

Tags: Asset Allocation, Investing, Investing over Time, warren buffett

Cash In On The Economy’s Problems

August 27, 2008 | Filed in: Investing | 5 comments

The most unintelligent thing that you can do with your money during an economic downturn like the one that we’ve been facing is to cash out, stand back and wait until the smoke clears.  It seems like an obvious thing to do to so many people.  But by doing so you are not only taking away from current earnings (by investing when the market is down) but you are taking away future earnings as well.

To learn more about investing and how to cash in on economic problems we might benefit by taking lessons from the world of business and the Oracle of Omaha.

A Smart Company Uses A Recession To Their Advantage

What do you expect a company to do during a recession?  Take your favorite clothing manufacturer (or any other business, i.e. video game company, restaurant, etc.) for example.  Over the past six months have they spent less or more money?  Do you notice them advertising more or less?  You may not know if they’re spending more or less, but you probably have a good idea on if they have been advertising more or less.  If they have been advertising less you would probably assume that it is because they are trying to cut costs during this downturn.  After all they’re probably selling less and marketing seems like the most obvious thing to cut first, right?

Wrong.

A smart company uses a recession to their advantage.  They should never cut back on advertising.  They might actually consider increasing their marketing budget.  They should be more picky on the quality of their marketing, but if they want to be more successful they need to maintain - or increase - their current level of marketing.

Think about it this way.  Let’s say that you and I own a company.  We sell trinkets to consumers.  We’ve been affected by the slow economy, just like everyone else.  We have maintained a steady budget in the marketing department over the past four years.  However we are competing against another trinket company who has been able to capture a larger market share than we have.  Cash is slowing down and we are considering cutting our marketing costs, just like our competitor has done.  Do we do it?  Absolutely not.  Our competitor has decreased their level of permeation among the public.  They’ve cut the number of advertisements in half!  We should take advantage of this and put our name out there even more than before.  By doing this we will ensure that the majority of the trinket sales are coming to us and even more we are ensuring that once the recession ends and people begin again to buy trinkets on a much more regular basis they will be looking to us to purchase them.  They know our name.  We kept it out there.

Our company not only succeeded, in the short term, by continuing its “investment” in advertising, but it also managed to ensure even greater long term success.

A Smart Investor (Likewise) Uses A Recession To Their Advantage

Just as a company should be smart about investing (through the mediums of marketing and advertising) in order to place themselves in a better position for the future, so should an individual investor be smart about investing (through the mediums of stock & bond exchanges).  No one has ever been better at investing than the Oracle of Omaha, and likewise no one has ever said it better…

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. -  Warren Buffett

Bear with me on my analogy.  Just as a company uses market fluctuations to their advantage, so should the average person.  Why let a little bit of uncertainty get in your way?  Sure you might not know who is going to be President of the U.S. next year.  That decision alone may have an impact on the stock markets.  But are you investing in the stock markets, or are you investing in a business?  Warren Buffett prefers to invest in business, and frankly he’s the rich one.  Surely we could learn a little from him?  As he said you should “profit from folly.”

We have seen some severe market fluctuations over the past year.  This is scary and will always be scary.  It’s best to hold tight and hang in there.  Just because we’re facing a recession does not mean that you should stop investing, or worse pull out of your investments.  Do as Warren Buffett does.  Even in the midst of a recession he has been continuously investing.  Why should you do any different?

Technorati Tags: recession, stock market, investing, money, warren buffett, business

Tags: Business/Entrepreneurship, Investing, recession, warren buffett

Weekend Reading: June 14th

June 14, 2008 | Filed in: Weekend Reading | No comment

Welcome to the first edition of Weekend Reading. A lot of blogs out there do this and I think it’s a fantastic idea. Most of the following links are from my blogroll, so I’d definitely recommend your taking the time to go through the blogs I link to occasionally. There’s some great information out there. This week there’s some great reading. Our topics include fuel prices, credit card companies and their targeting of college students, Warren Buffett’s advice to a novice investor, ways to save money when going out and advice on investing in dividend paying securities.

Ryan at The Better Credit Blog brings up a fantastic point regarding personal finance education (or the lack thereof) and how credit card companies specifically target college students because of their vulnerability. Check out How College Students are Taught Personal Finance by Credit Card Companies.

Tim Ferriss, author of The 4-Hour Workweek, recently attended the Berkshire Hathaway annual shareholders meeting and had the opportunity to ask Warren Buffett a question. He asked Mr. Buffett, “If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings?” Warren Buffet responded with a very unexpected answer. Check out Tim’s post about this experience: Picking Warren Buffett’s Brain.

Michael at Money Musings talks about everyones favorite current subject: gas prices. It’s actually a redux to a previous post by him about the stress caused by increasing fuel costs. It’s an interesting read and also has a link to a downloadable excel spreadsheet which can be used to calculate fuel costs if it were to cost a certain amount ($6 a gallon, anyone?). Check Out Gas Price Stress Redux.

With the increase in fuel costs it’s becoming more difficult to stay within a budget, especially for us twenty-somethings. Trent at The Simple Dollar gives some practical advice on how to have fun and go out while keeping your costs low. Check out Sixteen Ways to Go Out on the Town on the Cheap.

Blake at Youngdough.com shares with his readers his strategy for investing in SOLID dividend paying securities. Check out How I Invest in Solid Dividend-Paying Securities.

That should be enough to keep you busy this weekend. I’d love to hear your comments on this weeks weekend reading. We’ll do this again next weekend.

Tags: credit cards, earning dividends, fuel costs, going out, Investing, twenty somethings, warren buffett