Between 1965 and 2018, the S&P 500 returned a staggering 15,109 percent --- an average annual compounded gain of 9.7 percent.
Except for when you compare it to the insane 2,472,627 percent return of Warren Buffett's Berkshire Holdings over the same time period --- an average per yer growth of 20.5 percent.
With the return on Berkshire stock sitting at over 163 times better than the market, Buffett has cemented himself as the most successful investor of our time.
Every year, Buffett drops some great nuggets of wisdom in his annual letter to shareholders. His most recent letter was published in February, setting the stage for the company’s annual shareholders meeting on May 4, 2019.
Here are some of our favorite financial lessons from the “Oracle of Omaha” over the years (many of which apply especially well to physicians).
1. Invest for the long run early in your career.
Whatever you do, do not panic in the short term.
Trying to time the markets is the main reason why DIY investors experience lower returns than index funds.
Buffett once said:
"If you aren’t willing to own a stock for ten years, don’t even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value."
Confidence and patience will be key themes throughout here.
2. Don’t try and pick winners and losers.
During a 2004 shareholder meeting, Buffett was asked by an attendee whether he should:
- Hire a broker.
- Invest in an index fund, or...
- Buy Berkshire Hathaway shares.
“Among the various propositions offered to you, if you invested in a very low-cost index fund – where you don’t put the money in at one time, but average in over 10 years – you’ll do better than 90 percent of people who start investing at the same time."
Essentially, avoid gambling when you invest. Slow and steady wins the race.
3. Get your debt under control quick.
For the vast majority, becoming a doctor means enduring loads of student debt. There's simply no way around it.
However, your lifestyle early on in your career can have a major effect on your ability pay down loans. Whether that effect is positive or negative is up to the financial decisions you make.
To quote Buffett:
“The most important thing to do when you find yourself in a hole is to stop digging.”
Do everything in your power to avoid racking up high interest credit card debt on top of your student loans. At the same time, create a plan to pay them down.
4. Develop solid money habits.
Practice living frugal. The best way to do so is by embracing healthy financial habits early in life.
“Most behavior is habitual, and they say that the chains of habit are too light to be felt until they are too heavy to be broken… I think the biggest mistake is not learning the habits of saving properly early, because saving is a habit.”
For new doctors, this may mean continuing to live like a resident on your practicing salary. Easier said than done? Absolutely. But the positive impact is undeniable.
5. Don’t overpay just because you can.
If you haven’t already, you may reach a point in your medical career when money is of little concern. But that doesn’t mean you should pay top dollar for everything you buy. If you do, you waste money that could be saved or invested.
Buffett is famously frugal. He has lived in the same house for decades while amassing his $82.5 billion fortune.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,” Buffett wrote.
Translation: Shop around. Wait for deals. When possible, negotiate on price. Even after you’ve made it as a practicing physician, spend your money like you did as a resident (when it's sensible).
6. Money isn’t everything.
Of course having more money makes life easier. But it can also make life far more complicated if you fail to use it wisely. That's why you need to make sure you keep your priorities in perspective.
“Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends.”
It's ok to indulge in luxury items and experiences from time to time. Just don't lose sight of the bigger picture.
7. Evaluate investments like you diagnose patients.
You don't diagnose patients just by looking at them. Nor do you base your diagnosis solely on what others believe might be wrong with them.
- You review their medical history.
- You run tests.
- You examine.
And you should do the same when analyzing investment opportunities.
- Pay attention to the background of the company or investment, not just the major headlines you see or hear about it.
- Avoid being overly swayed by what people are telling you about an investment.
- Don’t obssess over short-term movements in its value.
Buffett studies a company’s management. What are its competitive advantages?
Does it provide a high-quality product or service that’s in demand? Has it experienced long-term growth?
“Whenever Charlie (Munger) and I buy common stocks for Berkshire’s insurance companies… we approach the transaction as if we were buying into a private business,” he wrote in his 1987 shareholder letter. “We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale.”
Perform your due diligence at all costs.
8. Never underestimate the power of American capitalism.
In his 2018 shareholder letter, Buffett detailed his first investment: three shares of Cities Service preferred stock. The 11-year-old Buffett bought it for $114.75 in March 1942.
At the time Buffett made his investment, the U.S. had just entered World War II after enduring over a decade of the Great Depression.
Today, people are bombarded with headlines about government deficits. Pundits often warn of a second coming of the 2008 financial crisis. The political environment does little to allay these fears.
When people are scared of what might happen, they typically flee to safe assets like gold. Buffett wrote that if he had done that with his $115 in 1942, his investment would be worth $4,200 today.
But what if his first investment had been in a no-fee S&P 500 index fund, and all dividends had been reinvested? On January 31, 2019, his stake would have been worth $606,811 (before taxes).
“The magical metal (gold) was no match for the American mettle,” Buffett wrote. “Our country’s almost unbelievable prosperity has been gained in a bipartisan manner. Since 1942, we have had seven Republican presidents and seven Democrats. In the years they served, the country contended at various times with a long period of viral inflation, a 21% prime rate, several controversial and costly wars, the resignation of a president, a pervasive collapse in home values, a paralyzing financial panic and a host of other problems. All engendered scary headlines; all are now history.”
9. Avoid investing in the hot, new industries.
Just as you don’t want to be too conservative when investing, Buffett advises against being overly seduced by innovation and technology.
“Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be. In the past, it required no brilliance for people to foresee the fabulous growth that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But the future then also included competitive dynamics that would decimate almost all of the companies entering those industries. Even the survivors tended to come away bleeding. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.”
Not what a tech start-up loves to hear, but hey --- we're up for the challenge.
10. Know when to cut your losses.
Buffett is forthcoming about the mistakes he’s made in business and investing. One example he often cites is losing $400 million on Dexter Shoes in the mid-1990s.
What Buffett tries not to do is compound his losses by waiting too long to exit a losing situation. Don’t fall victim to sunk cost bias. (It forces people to stick with a losing proposition because of the emotional need to justify the money or time spent.)
Rather, it’s best to walk away from a loss early, analyze how it went wrong, then make a better decision with your next opportunity.
Or as Buffett opined:
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Confidence and patience are key, but so too is knowing when it's time to abandon ship.
11. Do not borrow your way to wealth accumulation.
Despite all of Berkshire’s investment success, there have been times throughout its history when the overall market has dragged down the value of its shares.
Still, Buffett views these dips as opportunities. And you can too as long as you are not handicapped by debt.
In the company’s 2017 letter to shareholders, Buffett included a table of four occasions when the company suffered major dips:
- A 59.1 percent decrease between March 1973 and January 1975.
- A 37.1 percent decline during a single month in October 1987.
- A 48.9 percent loss in value between June 1998 and March 2000.
- A 50.7 percent drop between September 2008 and March 2009.
Buffett uses these examples to warn investors against using borrowed funds to purchase stock.
“This table offers the strongest argument I can muster against ever using borrowed money to own stocks,” Buffett wrote. “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
When it comes to your hard-earned money, it's better to be safe than sorry.
12. Your reputation is one of your most valuable assets.
In regards to your career trajectoruy, treating patients with respect is just as important as the medical treatment you provide.
This is especially true in the age of social media and online reviews. While your patients may not tell the digital world about all of the good things you’ve done, they are far more likely to rant about their bad experiences.
As Buffett once said:
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Perhaps your name is the most valuable investment of all.
As you can see here, Warren Buffett has been dubbed the Oracle of Omaha for wide variety of reasons. He's the most successful investor of our time, whose business-savvy will be studied for years to come.
To recap, here are some of our favorites from over the years:
- Invest for the long run.
- Don't try to pick winners and losers.
- Get your debt under control quick.
- Develop solid money habits early on.
- Don't overpay just because you can.
- Remember money isn't everything.
- Examine your investments like patients.
- Never underestimate American capitalism.
- Avoid investing in the new, hot industries.
- Cut your losses before it's too late.
- Don't borrow your way to wealth accumulation.
- Protect the value of your repuation at all costs.
Whether you're new to practice or a seasoned physician, these 12 financial lessons from Buffett can help you flourish financially.