057 Investing Today & Warren Buffett's Way

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, Grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Well, we're in a unique convergence of a whole lot of uncertainty in today's time. Whether it's the wars, whether it's rising interest rate, whether it's inflation, whether it's supply chain issues, all kinds of things that are coming together that are gonna affect your pocketbook, they're gonna affect your wealth, they're gonna affect your wealth creation. Now, this was the conversation that my members of my affluence blueprint and I were having just the other day. I walk them through the process of what they need to be considering what is going on. But I did it in a unique way. We brought in Warren Buffett. We talked about what Warren Buffett is doing to deal with these things and how it relates to you. So I'm going to let you in on the inside so you can see the conversation so you can get the training and the nuggets that they got. What do you need to do today to survive? And what is Warren Buffett's way? I'll see you in the episode. Welcome to this episode of the Affluent Entrepreneur show.

This is the Affluent Entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom. Because that's what it really means to be an affluent entrepreneur.

Since the last time we had a chance to chat, we've had a lot of things happen in our world, in the economy and. And everything. And I think that we need to be aware of it as. As we. We kind of navigate going forward. Let me just.

Go to the iPad here for a second. So if we, if we just look at this, this whole thing and hopefully you guys can see my screen, let me know in the chat and feel free to unmute at any time. But if we look at what we've, we've been through one.

We got the Ukraine situation.

It's, it's unfortunate. We've got a lot of loss of life, we've got a lot of uncertainty, we've got a lot that's going on. We don't know what's going to happen with China. So there's probably one, one B is, is China.

And everything you've got, you've got market.

Volatility.

In, in the sense that, that we've watched the market on days, the stock market in days.

Swing as much as 800 points in a day.

Okay? You've got inflation.

Higher than, than it's been in decades. Okay? It seven plus percent, okay? You've got the Fed.

Saying, hey, in order to, to try and stem the tide of inflation.

They'Re, they're raising interest rates. So last week they, they raised, they raised the interest rate by a quarter percent. They call it 25 basis points.

And they've indicated right now that they're going to raise it six more times. Six more times in 2022. Okay?

So we have, we have that going on.

The, the other thing that I think that, that we have also is a.

Overhot.

Real estate market.

Okay? And when I say real estate market, it's, it's on values.

And rent rentals because rents have gone up. Okay? So all of this starts to equate to.

One word that affects all of our financial future. And that one word is this.

Uncertainty. When we have uncertainty, when we have uncertainty, that's when people become tenuous, they become.

Cautious at some level and fearful at another level. And so we tend to not do the things that we ought to be doing to sustain ourselves through these downturns. Now I, I and I, and what I'm going to say in here in a second, I do not want to under.

Play the reality of what's going on in the world.

But we've been through wars before. We've had planes fly into the World Trade center horrifically. We've been through market volatility before. We've had market corrections, we've had market downturns, we've lost 50% in the market in 2020, we lost 34% in a matter of 20 days. We've had high inflation in the past and we've had a heated up real estate market. So none of these things, what I'm getting at is none of these things are.

First time situations that we now have to Navigate, they just happen to be in our time situations that we have to navigate, that there are people out there that have never even understood what inflation is. They've never experienced it. I lived through the 70s, I lived through the 80s, I saw all of that. I saw the gas lines went, oh my God, gas prices were 73 cents a gallon and now we've got them at seven bucks, you know, so, so I've lived through, through this and we see these cycles.

And the argument then is, well, what do we do? Well, we find ourselves falling back to sound principles. We find ourselves looking long term, are there opportunities to make money in the markets or in the economy based on the opportunistic availability of things that might exist today because of the circumstances? Certainly that are.

But I would submit to you that that is more of an opportunistic trader mentality than it is of a long term investor mentality. And, and as long as you understand what hat you're wearing at the time.

Then you'll bring the proper tools, the proper thought process, the proper mindset to the game that you're going to play. But you don't come to a game with an investor mentality and then try to play it like a trader. That's like, like turning around and saying, I'm going to play football based on baseball rules. It just doesn't work and, and it becomes a mess. So part of this is just for me to say, look, I get it, there's a whole lot of things going on. What do we do, how do we do this, what's next? And some of it is simply saying, stay true to principles, stay true to the course, stay tuned to some things I want to share with you. So I do this every year.

Warren Buffett, conceivably the potential.

Best investor of all time. Now, there's an argument to be made that the reason he's the best investor is because he started investing so at such a young age and that time did a lot of heavy lifting. But he has a perspective now that he's in his 90s that no one else has had and so that other people may not be able to.

Bring to the table. And he writes about his perspective in his annual shareholders letter. But I think that there's some things to be gained from it. And if you want to, you can download his letters, all the historical letters, and he writes it as if it's granddad writing to you.

It's not, it's not all this. He's not saying, well, you know, the standard deviation of this Investment was. No, it's none of that. And.

He'S real about how he presents some things and why he thinks about some things. And so I literally was this morning reading through his investor letter that came out last month for last year. And I think there's some things to just think about.

As we kind of look at this. And I want to bring it up because I highlighted it and I'm going to bring it up for you to, to see.

And so this is, it starts out comparing the performance of Berkshire. Berkshire Hathaway is his, is his company.

It's Warren Buffett. Warren Buffett, okay? Berkshire Hathaway. Berkshire Hathaway is his company.

The. I should, I should know this, but.

If I look at. So Berkshire is one of those.

Companies that is not, has not necessarily been affordable to everyone because the, the share price. Let me just pull it up.

So the share price for Berkshire Hathaway right now is a whopping $527,000 as we speak. Okay. Per share. So if I wanted to buy a share of, of, of a Berkshire Hathaway, it's half a million bucks. Okay, now they do. They did create what we call a B share that, that allows you to invest in that is a little bit more affordable, and that's $351 as we, as we record. Okay. Per share. Now, I only say that, that this company has been around for a while. And the reason that Berkshire has and Warren Buffett and Charlie Munger, which is his partner, they were best friends growing up. And so you look at what they've done. This is from 1965 to 2021, okay? Average rates of return of 20%.

Compared to the S&P 500 of 10%. Now, 10% is pretty doggone good. At 10%, every seven years, you're going to double your number. That means in 14 years, you've quadrupled your number. You've got a million dollars. In 14 years, you've got $4 million. And so, so what ends up happening? But with 20%, that accelerates like crazy. But that doesn't mean that it's, it's been this straight line. It's not a straight line because you look at it and he's had some really bad years compared to the, the market. Here's, here's this year was 15. 2015 lost 12 and a half percent. The market was up 1, lost 19%. Market was up 21, lost 23%. Market was done down 3. So it's not all up. It's not all roses for, for Berkshire Hathaway. But I want you to understand how he looks at things. And I do this because I think that when you start to look at companies, when we start to look at investments, what we are buying into is partly the management, the culture and the philosophy. It's not just the business model because the business model is a byproduct of the management, the culture and the philosophy. And so if you listen to how he speaks to his shareholders, this is the richest, one of the richest men in the world and how he speaks to his shareholders and honors them, that tells me a lot about the management, the culture and his philosophy. And so he says our positions carry the responsibility to report to you what we would like to know if we basically were in your shoes.

We will report to you what we think we would want to know if we were sitting there as an absentee owner. And then he goes on is, and this is where I start to look and say, what should we be investing in? In an inflationary uncertain time? There are two, there are two primary investing philosophies.

Growth. And we talk about this in the modules. And value growth stocks are going to be your high flying, non dividend kind of stocks. They're going to be your.

More techie, they've come to known as.

The Facebook, the Amazon, all of those stocks that you're buying into those stocks for purposes of achieving appreciation and stock price. We want to see the stock price go from 100 to 200 to 300. And the only way you get a return on your investment is when you sell the stock. Then there's those companies that are what we call value companies. Those are typically more mature, they're more solid. You're buying because they have ongoing cash flow, sustainable operations and they're typically paying dividends. And in different times.

Each one of these will, will do different things. Growth stocks in a low interest rate environment and low inflation environment will typically perform better than value stocks In a higher interest rate environment, higher inflation environment, value stocks will perform greater than growth stocks. But I want you to hear what he's looking for. Now.

Let me, let me be clear what Warren's perspective is on holding period. You know, instead of saying I'm going to buy something and hold it for three days and sell it or a year and sell it, they evaluate investments under the premise that they will hold it forever.

And so because of that he looks at it. He says, I want businesses that are both have, with both durable economic advantages and a first class CEO.

So we got to look at businesses that might.

Have this durable advantage over time, even in a down market, even in an uncertain time, that, that will, will look at things in a, in a very different way. We want to focus on the long term business performance and not because we view them as vehicles of timely market moves. In other words, they don't want to buy into trends, they don't want to buy into memes, they don't want to buy into the emotional swings of the market in that current zeitgeist that might be going on. Okay. And, and so really what we're looking for is, is buying pieces of wonderful businesses at wonderful prices.

And he goes on to look at it and says, we operate now, now you start to get a feel for what, what kind of companies he has. And I'll show you what it is. Berkshire owns and operates US based infrastructure assets, railroads. Okay. And in fact, people were talking about him going, you're buying a railroad, what are you doing? Why would you buy a railroad? And, and yet.

Somehow in the midst of all of the pandemic, the supply chain issues, the railroad is the solution that is coming to play right now to get supplies and things into the mid country.

So he's buying things that aren't sexy. He's buying things.

That are going to be here for a long period of time. He's buying things that he's not, he's not, he's not looking at it going, oh my God, today I went up 10%. No. But over time he's averaging 20%. That's pretty doggone good. So if we look at it from that perspective, then he then does something where he talks about the history of Berkshire and the failures, the mistakes that they made and they made the mistake and some mistakes. But here's, he says, in fairness, he's talking about taxes. Now they paid, I don't remember like $3 billion in taxes or something like that. Says our shareholders should acknowledge and indeed trumpet the fact that Berkshire's prosperity has been fostered mightily because the company has operated in America. Our country would have been, have done splendidly in the years since 65 without Berkshire. Absent our American home, however, Berkshire would never have come close to becoming what it is today. When you see the flag, say thanks. Here's a guy who appreciates his roots even though he's a kabillionaire and says, hey, let's thank people for the opportunities, the gifts that were given to us. Now if we look at this, what, what kind of business is he investing in? Insurance. And here's why. The product will never be obsolete. The sales volume will generally increase along with the economic growth and inflation. He's looking for things that are going to look at long term to make that happen. Some of the things that he owns, Apple, okay, a railroad, insurance, he always writes directly to them. He doesn't say our railroad investment. He says your railroad investment. He's talking directly to the shareholders.

And then you'll see their biggest holdings. So here's their biggest holdings. American Express, Apple, B of A Bank of New York. So he's got a lot of finance, Charter, Communications, Chevron. He has. He's had Coca Cola for God knows how long. And from what I understand, he still drinks like seven Cokes a day. And I just saw an advertisement for Coca Cola that they came out with. Coca Cola with coffee. I mean, like double zap, the caffeine. I mean, holy moly. Okay, General Motors, Mitsubishi, Mitsui, Moody's, Bancorp, Ryzen. So those are the biggest holdings that they have. And this is the percentage of the company they own. So they own 20% of American Express.

13% of B of A. Okay, almost 6% of, of Apple. They own that percentage of it. And if you look at it, they paid $104 billion for those investments. They're worth 350 billion. They've tripled.

Okay? So you get a chance to start to see what.

What kind of pixie has and why he's doing that. Now, this other piece that I think is important for us to understand, and I think it applies to you here. Is this Berkshire's balance sheet, not that you're going to have this much, has $144 billion in cash. They're sitting on $144 billion in cash. But here's the thing that, that I think is interesting. Charlie and him, his partner, Charlie and him have pledged to always have more than $30 billion in cash. This applies to you now. Okay? We are in a time of uncertainty. We are in a time of potentially rising interest rates, inflation. The, the. The potential exposure to a recession if the feds don't get this thing right and land the plane very softly, which history shows that they're not really good at that. So is it expected that there might be a recession? Yeah. How long? How deep? Who knows?

I hope I'm wrong, but we'll see. Here's what they say here, though, and why it's important to you. $30 billion in cash. We want your company to be financially impregnable and never dependent on the kindness of strangers or friends. Both of us like to sleep soundly. And we want our creditors insurance claims and you to do so as well.

You're going to hear a lot of people saying cash is, is, is trash. You're not going to be able to get any kind of return on your cash. Why are you doing it? You're actually losing money. If inflation is at 7% and you're getting 1%, you're losing 6%.

I get it. But it's the thing that's going to allow you to sleep at night. It's a, it's the thing that's going to give the liquidity to sustain yourself in a downtime. Now, I'm not saying to have everything in cash, but I'm saying that liquidity matters during uncertain times for two, for a couple reasons. One, it gives you the peace of mind. It allows you to take care of yourself. If, God forbid, something goes south on you or you start to see that I can't sustain myself or the business isn't going the way I want, or the job isn't going the way I want, I have the cash. This is why we say the peace of mind fund should be 12 to 18 months. Call it 12 months on the low side. I, I want to give you that Runway room to make that happen.

And so that's the one aspect of having the cash. The other aspect of having the cash is this when we start to move through these uncertain times, there's stuff that goes on sale. There are opportunities that will come your way. And the best way to be able to take those, take advantage of those opportunities. I don't like to the word advantage because it feels like you're taking something from someone else. But to be able to avail yourself of these opportunities is to have the cash to get into them. So the reason that I'm sitting on a fair amount of cash is 1, there's, there's, and I'll be totally transparent. Look, I'm 6, I'll be 61 this year. I don't need to get hit with a big market downturn. I've got a plenty in the, in the market, Tom. I've got plenty in, in other investments. I'm sitting on a lot of cash because I want the liquidity and the choices it gives me moving forward. Even if the market goes down 30% and I want it there so I can take advantage of possible opportunities that start to present themselves and, and do it without taking on an inordinate amount of debt and putting me in a precariously stressful situation at, at you know, 60 years old. I would probably do this differently if I was 30, because I know I have a longer Runway. And so what I do today, I do because I love it. I do. And I can. Will continue to do it because I love it. And because of my financial situation has afforded me the, the, the ability to sit back and say, I'm going to do what I love. And I want that for each of you. I don't ever want to jeopardize that be by taking on undue risk at an age where I want to just do what I want to do. I want to do what I love and, and do it that way. So I, I think this idea of cash and you start to see why.

Warren Buffett and Charlie Munger at Berkshire Hathaway are saying that and said so. They also wanted to keep 80% of their net worth in equities. Now they are a company.

You are an individual. The company will go on when Charlie and, and, and Warren are gone. What you need to look at is, is your life cycle and your heirs and everything, because 80% is probably not a good number. I'm Nowhere close to 80% in equities, stocks in the market, because it's too exposed, too risky at that age. Okay, so he goes on, and there's some things in here that, that you can read if you choose to do it, if you just do a search. And I can, I can post this up so you can, you can get access to it, but they, literally every year you can pull them down. But here's the other thing that I think is really important that he talks about. He said, I, I taught my first investing class 70 years ago. Since then, I've enjoyed working almost every year with students of all ages, finally retiring in 2018. So he stopped teaching in 2018. He said along the way, my toughest audience was my grandson's fifth grade class.

And, and so what he's doing is he's, he's talking to you like granddad, you know. But he says, this is the important piece. Teaching, like writing, has helped me develop and clarify my own thoughts. Why do I ask y' all to make sure that you are writing things down, that you're documenting things? It's because it's going to help you clarify your thoughts in your intimate relationships, in your committed relationships. To have the conversations and to have real conversations is going to allow you as a couple to clarify your thoughts and to coalesce around those thoughts.

In a way that you wouldn't otherwise do. Because most couples and Most people aren't willing. We'll journal about our day, but we won't journal about our money. We'll journal about something that happened, but we won't journal about having a money conversation. Yet. It is through that process that we clarified and those of you that then start to bring little ones in the world as they start to grow, and I know Bobby's doing this.

As they start to grow, to open up those conversations and to allow your kids, your youth to clarify their thoughts and be able to communicate that effectively.

And so I look at this, and I love that. Charlie Munger is phenomenal. His partner, and he just. He wrote this, he says. Charlie calls this phenomenon the orangutan effect. He says, if you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate.

But you will yourself exit thinking more clearly. And I think that as we start to grow, the lessons you're learning here, the conversations that we're having with each other, the. The life that you're moving through, I think.

That you go teach it.

That you go now and talk just a little bit about money, about the struggle, about the mindset, because then we open up conversations that aren't open right now, and it forces you to articulate. It forces you to sit back and say, how do I present this in a way that it makes sense?

You all are on a journey. This journey is hugely valuable for people. Bobby and I were having this conversation yesterday that when.

When I had that martial. My martial arts studio for 11 years, we would do a black belt test, and the black belt test was five hours long, and they're exhausted at the end. And when I'm ready to give them their black belt, I look at all the students that just passed, young and old. I say, you.

Are more important to the school than I am. And they're looking at me going, you're sensei, though. If you're the sensei, without you, there's no school. I said, maybe, but in you, because you're still in the journey, and you just moved through the journey, they see possibilities, ability, much clearer than they do with me, because I've been doing this for 40 years.

And it's the very reason that as sensei, they may not see possibility, but they might see aspiration. But I need them to see possibility within reach.

And as you move through your journey, you become possibility within reach for the people around you that just might be struggling.

So.

So that's. That's how I. I look at this, there's, there's a couple of other little things in here. I'll leave that for you if you want to read, read it. But I think that there's.

There'S just a lot that we can take from someone like this who has for decades, 70 plus years navigated the financial markets and done it in some cases.

Contrary to the popular thing at the time. But he stayed true to his values, he stayed true to his roots, he stayed true to the principles and they proved.

Out well. And I think that when we put on the, the Persona of investor Warren Buffett's probably a good dude to take a look at now. Persona of trader that's not Warren Buffett and that's a different game that we play because that's playing trends, that's playing market movements, that's playing emotions and everything. And so. And I'm going to be doing an episode on, on fundamental analysis. I'm going to do another episode on technical analysis. They're different things. One is looking at pictures and charts. The other one is looking at the fundamentals of the business, saying, here are the things, the six things that I look at in a business before I'm going to be. Before I'm going to make an investment. Okay? And so.

That'S this whole idea of, I think, how we need to navigate the times that we are in, given the situation that we're faced with and the levels of uncertainty. For those that haven't lived through some of this before, it seems new, it seems daunting, it seems scary, it seems uncertain. But if we look back on our past, we've been through it before. Unfortunately, I think that we haven't learned some of the lessons and we're destined to learn them. Sooner or later, the message will come across louder and louder until we finally listen. And so.

It'S not so unusual that we know nothing about what we're going to do. It just happens to be.

That we're in a time where these things are converging.

And we're going to need to navigate it and we need to be smart about that to move forward. So I wanted to start with that as a primer to just kind of set the stage of what I think. And this is why I want us to do these calls and do these regular calls so we can have these conversations and then we can help navigate as these things go.

Go on. And we get a chance to look at it and say, here's the same reason why I think we all, at some point in our lives want to make sure we have the right advisors in our life.

Because we all, at some point in our lives need to be able to go to someone and say, talk me off the ledge. Okay, I'm feeling. Because there's been times I will totally frankly, there's been times that I listened to someone that freaked me out so much that I stepped out of the hall. I called my, at that time a broker, not a. Not an advisor, and said, sell everything, put me in cash.

It was nuts because couple things I was trying to do. I didn't have any analysis behind it. It was all emotion. Okay. Two.

I had no strategy behind it. Okay, So I had no analysis. I had no strategy. I was making a decision based on emotions. Three, this is the accountant side of me. I triggered a whole bunch of tax by doing the transactions that I shouldn't have done. So I ended up paying Uncle Sam taxes. And then four, I allowed it to just sit in me. And so I sat in cash and didn't do a thing. And I was. And the fear took on, came on to me and I was scared to get back in.

And it's the typical roller coaster of emotions that kept me out of the market. And if you look at statistics.

You can't time the market. I was sitting back saying, oh my God, get out before it hits the bottom. But I didn't know whether I was at the top, in the middle, at the bottom, which also meant that I didn't know when we were at the bottom to buy back in again. And I had all that fear and I didn't have the people around me to say, you're good, tiptoe in, move back in. And so that's part of this, this whole process is to. To be able for us to have real conversations about the realities of what we're all dealing with. And I'm not exempt from it at all. So I hope, I hope that. Hope that helps.

Thank you for listening to the affluent entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

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