Warren Buffett’s Teachings in the Eyes of a Millennial (pt. 1)
“How much better is it to get wisdom than gold!” -Proverbs 16:16
Buffett shared five quotes that each drive home the points of lowering financial risk and maximizing potential future gain in tried and tested areas. I’m going to chat about three of them explain why the pull is so mighty for entrepreneurs, students, and early-career folks alike. Regardless of your views on capitalism, he has domain mastery of finance and investment philosophies that are worth noting. These can totally be applied to various facets of life.
The quotation above is my one my favourite of his musings. It reminds me of a certain TED talk about being a mulitpotentialite.
This quotation on hearing it makes me imagine…It’s essentially a very smart way of not putting all your eggs in one basket. This quote makes me think that it’s better to have the chance and hope of building multiple revenue sources, than depending on only one. Obviously this depends on the revenue source but the sentiment is very clear. This pushes the individual to go past their comfort zone in the short term but in the long term become more self sufficient and by becoming less dependent and attached to that singular source.
If we think of “dependence” as a “force” we put on a revenue source, it would be like this graphic on the left. There’s less pressure or “attachment” to that revenue source (for the purpose of getting money from it) if we spread the “area” of our sources of revenue.
This also leads me to another point. Besides investing in business ideas, Buffett is probably also making a reference to the diversification of one’s investment portfolio. Diversifying is an excellent de-risker. Keep this in mind, we will return to risk soon.
This quotation about spending had me confused at first. Naturally, my mind jumped right on the spending part of the quote. As a result, I thought that this was a word of advice based on spending.
From there, I was reminded about this amazing post about how somebody started a software as a service business with about $40,000 illustrates the realness of being committed to providing an action on the quote above.
This is all well and good, but the quotation above is about saving, not about spending. Spending should be the aftermath of saving if possible at all, on doing more meditation and research on the quote.
The amazing part about these quotations from Buffett is that they are highly intertwined and interlaced as they are applied. Taking risks is an important aspect of building wealth as Buffett preaches, but investing in multiple revenue sources is a great way to diminish risk,
People invest to earn a return on their money, but returns are not the only consideration. Risk and return are connected. Generally, the higher the risk of an investment, the higher the potential return. Here are some examples of how risk can affect investment return.
Risk of Building Businesses
This is a writeup for another time but there are several risks of building a business. Sound MVP planning, business model canvas, and risk analysis is essential.
In the early stages, I suggest making something called a lean canvas.
This website says,
A lean canvas is an adaptation of Business Model Canvas by Alexander Osterwalder which Ash Maurya created in the Lean Startup spirit. Lean Canvas promises an actionable and entrepreneur-focused business plan. It focuses on problems, solutions, key metrics and competitive advantages.
It will help to document how you successfully built your business machine, get it down to a science so that it’s replicable. (Further more, the Bullseye technique, is a great test tool for hypotheses)
Risk of Investing
Firstly, not all investments perform well at the same time. Different types of investments are affected differently by world events and economic factors such as (interest rates, exchange rates and inflation rates). Secondly, a portfolio with diversification will have lower total risk than combined risk of the individual investments.
- Market Risk
- Equity risk is related to an investment in company shares. The market price of shares varies all the time depending on demand and supply.
- Interest rate risk is related to debt investments such as bonds. It is the risk of losing money because of a change in the interest rate. For example, if the interest rate goes up, the market value of bonds will drop.
- Currency risk usually refers to foreign investments. It is the risk of losing money because of a movement in the exchange rate. For example, if the U.S. dollar becomes less valuable relative to the Canadian dollar, your U.S. stocks will be worth less in Canadian dollars.
The list of risks go on and on. We will delve in a bit more in the future, but here is just a taste of things to keep in mind of:
- Liquidity Risk
- Credit Risk
- Concentration Risk
- Reinvestment Risk
- Inflation Risk
- Horizon Risk
- Longevity Risk
- Foreign Investment Risk
Usually, the real world case ends up being that 99% of revenue comes from one source, and the rest from some interest on an RRSP for example. Buffett prompts us to think differently.
Ahh, the stuff you miss by only focusing on computer science. Biztech is king, so why do they not prioritize teaching us this stuff in school?
Make investments, save first, and decimate risk in all moves you make.
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