Money Lessons From 5 Favorite Classic Novels

Money Lessons From 5 Favorite Classic Novels

We often can’t see our own mistakes through our rose-colored lenses. Instead, we can see errors more easily made by others when we are less emotional. The same happens when we find colorful characters in fiction who make blunders we know they should avoid. Reading books provide us with teachable moments.

 

Five Classics Illustrate Money Lessons:

  • Decadence Of Money
  • Social status
  • Reversal of fortune
  • Accounting fraud and corporate greed
  • Virtues of work
  • Financial independence

These factors play a role in impacting the lives of the characters below. Often, we have experienced some of these very same financial issues.

1. THE BEAUTIFUL AND DAMNED BY F. SCOTT FITZGERALD

“I shall go on shining as a brilliantly meaningless figure in a meaningless world.”

“Wine gave a sort of gallantry to their own failure.”

I recently finished this novel packed with money lessons. It explores the decadence of money, social classes, socialites, and elitism. The lives of F. Scott Fitzgerald and his wife Zelda likely serve as a model for this work.

Financial Dependence

Anthony Patch has returned to upper-crust Manhattan, having graduated from Harvard. He socializes with his wealthy friends, parties, and drinks heavily. Partying leaves little time for a career or work.  As a presumptive heir to his grandfather’s fortune, he has no motivation to be purposeful. His grandfather, Adam Patch, raised Anthony after his parents died. The elder Patch made his wealth on Wall Street. Grandpa provides Anthony with an ample allowance. However, he has no patience for Anthony’s idleness, drinking, and lack of purposefulness. It doesn’t sit well with Adam, who is for prohibition politics.

Gloria Gilbert is a cousin of Anthony’s close friend, Dick, an author. She is an even match for Anthony by being a socialite who parties, drinks, and lacks seriousness. Seen as a beautiful couple with a bright future, they court (i.e., date) and eventually marry. Their relationship exposes their tendencies: jealousy, selfishness, easily bored, and vanity. Gloria’s friends often ask Anthony about his laziness and lack of goals, to which he asks, “Why can’t I be gracefully idle?”

Overspending

The Patch couple rent two homes in Manhattan and Westchester, which they cannot afford despite an abundance of money. Given the likelihood of inheriting a lot of money from  Adam Patch, their friends envy them for their headstart towards wealth. However, Gloria and Anthony are wasteful of money and time. These tendencies grow worse as they move through their 20s. They spend heavily on lavish parties, dining, traveling cross country, and to Europe.

Intermittently, Anthony visits his grandfather but comes to hate seeing him. Adam Patch peppers him with questions about his lack of savings, overspending, investing, financial responsibilities, and lack of goals. He wants to understand how the Patches haven’t saved money with an income of $7,500 per year—combining Anthony and Gloria’s allowances.  That they have not saved anything despite an abundant income disturbs his tycoon grandfather.

Adam starts to pursue his grandson’s opportunities even though Anthony insists that he is an author and spending his time writing. That said, he is yet to have published any of his articles.

Work Is No Occupation For The Patch Couple

At one point, Adam finds a job for Anthony as a bond salesman. Anthony tries to sell bonds but finds sales distasteful and quits soon after. Besides, Gloria has no fun when Anthony works because she has to sit around idly and alone. However, they recognize that Adam Patch could live another ten years and have difficulty making ends meet.  Anthony has no financial independence, relying entirely on his grandfather.

World War I has begun, and Anthony goes for military training in the South. He meets a woman, Dorothy (Dot), who is relatively poor, clingy, and does not know about Anthony’s potential wealth. Anthony opens up to Dot, sharing how hard his life has been. Dot is a good listener and doesn’t require much materialism, as Gloria demands. The war ends before Anthony sees action, and he returns to Manhattan and Gloria.

Budgeting Isn’t Easy.

Adam realizes that they need to budget so that they can afford their rent. He starts to record their income and track some of their spendings. They begin to make changes, like moving to a smaller apartment. Unfortunately, they use their savings frivolously as they have the little discipline to manage money. Gloria suggests earning money as an actress through a mutual friend who owns a growing movie studio. Anthony becomes jealous, refuses to let her do so.

They still have the house in Westchester and host a raucous party with dancing, drunkenness, and general depravity. At the height of the party, Adam Patch comes to the house unexpectedly. Adam is visibly upset and leaves with a friend abruptly. The next day, Anthony tries to see his grandfather apologize, but he is ill. Apparently, the party caused Adam’s decline. Within months, Adam Patch dies.

Disinherited!

The Patches have counted on Adam Patch’s fortune. They never considered that there was any chance of not inheriting his money. However, at a reading of the will, Anthony Patch learns that he is penniless. Adam’s secretary and very distant cousins received the bulk of $40 million. Gloria and Anthony hired an attorney to file objections to the will. Besides not getting the money, Anthony faced shame as the lawsuit became public given Adam Patch’s stature. The case, including appeals, was expected to take years and many upfront payments for retainers.

Financial Jeopard, He Should Have Had An Emergency Fund

“It was too late–everything as too late. For years now he had dreamed the world away, basing his decisions upon emotions unstable as water.”

The Patches needed emergency fund to provide liquidity. Anthony sold bonds to raise capital. At one point, he sold bonds that were only worth 30% of their par value. As a result of lacking money, Adam took the hit on the bonds. Yet, he still spent money frivolously. He treated his two best friends to dinner even though they made more money in their respective careers. As money became tougher to get, Anthony sunk into an alcoholic state. He spent most of his cash on cases of alcohol and stopped going out with friends.

Tensions were rising for the Patch couple. To raise cash, Anthony begins to write bad checks for rent payments. Then he tries to pawn his watch so he can buy drinks at a bar. He has trouble paying his retainer fees to his attorney as the case makes its way through the court system. It seems to be a hopeless case; he begins to believe he will lose the case. He misses the highest court’s decision because he was drunk and a mess.

The Case’s Decision

Gloria comes back to the apartment to tell him they won the case and get his inheritance. He doesn’t appear to care anymore. It is quite a downbeat ending for the reader. On the other hand, he doesn’t enjoy the win. Did Anthony get his just desserts, meaning that he caused his physical, psychological, and near financial demise based on poor management and discipline? He has never saved, didn’t have an emergency fund, overspent frivolously, lacked goals, and remained idle except for drinking. It is hard to have sympathy for Anthony and his wrecked life at the end.

Advice For The Patches

Anthony did not heed his grandfather’s advice to save money, invest, find a job, and earn an income. However, they would have been in far better shape had they boosted their income. Gloria and Anthony came from wealthy friends and families. They expected their wealth would come in the form of an inheritance. In the meantime, they overspent their allowances “to keep up with Jones.” Today we may refer to that as lifestyle inflation and something to be avoided.

The Patches should have controlled their spending, had a reasonable budget and an ample emergency fund. Adam, his wealthy grandfather, managed his money very well.

Virtues of Work

With a Harvard degree, Anthony would not have had trouble finding a job he liked. Work hard, and you can play hard.

.“Choose a job you enjoy doing, and you will never have to work a day in your life.”  Whether Mark Twain or Confucius said this, it is a sentiment worth aiming for whether you plan to work for ten years or 40 years. Embracing hard work allows you to put away money for savings, investing, and emergencies.

I always valued my work, appreciated its challenges, and a way to give our lives meaning. Sure, there are still days we would instead not be working. However, seek fulfillment from your job and career or make changes. Explore and broaden your interests. Our jobs give us a sense of pride, independence, identity, purpose, a way to meet people, improve our skills, and of course, financial support. The Patches needed a set of reasonable goals and a game plan to execute for financial success.

2. THOUSAND AUTUMNS OF JACOB DE ZOET BY DAVID MITCHELL

“For white men to live is to own, or to try to own more, or to die trying to own more. Their appetites are astonishing! They own wardrobes, slaves, carriages, warehouses, and ships. They own ports, cities, plantations, valleys, mountains, chain of islands. They own the world, its jungles, its skies, and its seas. Yet they complain that Dejima is a prison. They complain they are not free.”

Make A Fortune And Marry Your Wife

This historical novel, While not a classic, this historical novel begins in 1799, in Dejima, a small port near Nagasaki, Japan. Jacob de Zoet, has left his Dutch homeland to earn enough money and status to marry Anna, his fiance. First, he gained Anna’s father’s respect and approval to marry his daughter within a six-year timeframe. Jacob, the nephew of a pastor, is a young clerk with the Dutch East Indies Company. He has brought a valued Psalter from home but fears its discovery as a Christian book not allowed in Japan.

Accounting Fraud And Corporate Greed

De Zoet, an educated bookkeeper, stands out for strong moral fiber among unsavory and ethically challenged peers and managers. He is praised, promoted for honest accounting, and as quickly demoted and ostracized for his not wanting to sign off on doctored financial accounts. This novel is a morality tale released in 2010, shortly after the financial crisis. Accounting scandals and greed are not a modern-day invention.

Jacob favors the educated and those with strong moral fibers. He admires the highly trained midwife Miss Orito Aibagawa.  Orito has exceptional skills in delivering difficult babies, having studied under the likable and respected Dr. Marinus.

Jacob’s Highmindness

The Dutch East Indies Company’s members supplement their incomes by stealing money from the company’s accounts, smuggling, and cheating. They act according to their self-interest rather than that of their employer. The men justified illegal activities as they were stuck on a small island all year away from their loved ones. To Jacob, there is no justification for theft of any kind.

Good Versus Evil

Orito Aibagawa is a notable character for being independent-minded and well educated. She has more freedom and respect as a woman in this era. She grew up in a well-to-do intellectual family. However, she had a facial scar, which carries symbolism. Orito is a marked woman once her father dies.  DeZoet devotes his life to save her and others subjected to rape and horrific captivity. There is a lot of cruelty and betrayal in this novel.

Jacob represents the best of characters. His intelligence, strong work ethic, modesty, and sense of morality are great virtues among the chaos.

3. WUTHERING HEIGHTS BY EMILY BRONTE

“It would degrade me to marry Heathcliff.”

Wuthering Heights is one sad story with a cast of characters hard to tolerate. This Victorian novel is rich with morality, love of money and social status, inheritance, and gender income inequality.

Thank heavens for Nelly Deans, as a storyteller to Mr. Lockwood, a boarder to Thrushcross Grange, caregiver to Mr. Earnshaw ‘s children Catherine and Hindley, the orphan Heathcliff. Mr. Earnshaw has taken in Heathcliff, who was homeless with low social status. However, Mr. Earnshaw begins to favor Heathcliff over his son, Hindley, who in turn is consumed by jealousy. Hindley leaves the estate to attend college.

Inheritance

Mr. Earnshaw dies three years later, and Hindley inherits the Wuthering Heights. Once favored and pampered by Mr. Earnshaw, Heathcliff gets demoted to common laborer by Hindley. Hindley shames Heathcliff and becomes revengeful. Hindley marries Francis, and someone Hindley met in college. However, she soon dies in childbirth. Hindley drinks heavily and becomes more abusive to Heathcliff.

Money And Social Class Are Priorities

Catherine loves Heathcliff but marries wealthy Edgar Linton for money. She seeks social advancement, which Heathcliff cannot give her. The Lintons are socially more secure than the Earnshaws. Edgar loves Catherine, who learns to love Edgar.

Reversal Of Fortune

Heathcliff runs away from Wuthering Heights and comes into significant wealth mysteriously. He plans his revenge against everyone, especially Hindley. The latter has been mishandling money due to his despair and alcoholism. As a result, Heathcliff lends him money, and Hindley’s debts grow. When Hindley dies, Heathcliff inherits the Earnshaw estate. Keep in mind that women like Catherine were not eligible to inherit money and property in those days. Hence, Heathcliff was next in line. And that’s not all. By marrying Isabella Linton (sister of Edgar Linton), Heathcliff is now in line to inherit the neighboring Thrushcross Grange.

Heathcliff’s Return

Heathcliff’s return to the Grange unravels Catherine as his demonic love for her is her demise and is ultimately the demise of every character.

The conflict between Edgar and Heathcliff is between good and evil. Heathcliff’s turmoil is everyone else’s torture, except for his nephew Hareton Earnshaw, son of Hindley.

Wealthy Heathcliff But Without The High Social Class

Rising to gentleman based on his accumulated wealth, Heathcliff lacks the manners and dress of one in that social class. The former homeless person was now asserting his power overall, acquiring both estates. Heathcliff is among the most demonic, unhappy, miserable characters in all of literature. Young Catherine, daughter of Edgar and Catherine Linton, marries Linton Heathcliff. Linton is a son of Isabella (Edgar’s sister) and Heathcliff, being among the weakest and most pathetic literature characters.

It was difficult reading this story more than a few pages without wanting to throw the book. It caused that much discomfort. Catherine Linton married for wealth, comfort, and social status and may have lost Heathcliff, the man she truly loved.  Emily Bronte’s descriptions of the moors and scenery were beautiful breaks from its main character’s tirades and violence. I am glad to have read this unquestionably classic gothic story, rich in characters that will live on and on.

4. JANE EYRE BY CHARLOTTE BRONTE

“I am no bird, and no net ensnares me; I am a free human being with an independent will.”

“Some of the best people that have ever lived have been as destitute as I am; and if you are a Christian, you ought not to consider poverty a crime.”

The Bronte sisters produced memorable women characters. Charlotte Bronte may have remedied Catherine Linton’s weak character with Jane Eyre. This classic Victorian deals with wealth, social status, and, refreshingly, women’s financial independence.

“Reader, I married him.”

Jane Eyre, orphaned as a child, and a cruel aunt, Mrs. Reed, raised her. She is hired as a governess at the Thornfield Manor to teach Adele Varens, the ward of Mr. Rochester, a sad and dark character. She has strange encounters with Rochester, helping him fall from his horse and saving him from a fire at the manor.

Jane falls in love with him and is surprised when he proposes to her, given her low class. However, she learns Mr. Rochester is married to a woman who has descended into madness and is locked up away at the manor. The wedding ceremony is broken off. Mr. Rochester suggests they go to France and live as husband and wife. That proposal goes against Jane’s Christian values, so she leaves Thornfield with what little money she earned.

Jane’s Newfound Wealth

Becoming penniless again, Jane is taken in by the three Rivers siblings at another home and gets a teaching job. Jane learns that her Uncle John Eyre has died and left her a fortune. She realizes that her Uncle was also uncle to the Rivers, so she splits her inheritance with her new relatives.

Newly rich, Jane seeks to return to Thornfield and Mr. Rochester but finds the estate burned. Bertha, Rochester’s wife, set the fire and died. Now on an equal footing to Mr. Rochester, Jane rebuilds her relationship with him, and they are married. Before her inheritance, Jane had been too intimidated to marry the wealthy Mr. Rochester.

Female Independence

In this gem of a classic, Jane Eyre is a very progressive independent woman at a time when women, as brides, were expected to have a family dowry, property or money, to contribute to her future husband. Jane speaks her mind on parity to Mr. Rochester. We admire Jane for her strong moral character, generosity, and independence well ahead of her time.

5. THE SCARLET LETTER BY NATHANIEL HAWTHORNE

“She had not known the weight until she felt the freedom.”

Nathaniel Hawthorne’s classic The Scarlet Letter addresses public shaming, social isolation, conformity, earning money, and feminine resilience. Although it was written in 1850 and based on 1640s Puritan Boston, it remains relevant today.

Hester Prynne’s Strength In Adversity

Hester Prynne was a strong woman, accepting the consequences of her weak moment with reticent dignity. As a result of an extramarital affair in the 17th century, she had a baby (Pearl) out of wedlock. She has further exacerbated her crime by refusing to name Pearl’s father.

After a short inquiry, Hester Prynne is found guilty of adultery.  She is required to permanently wear an “A” on her dress for all to see.  The community is encouraged to shun, shame, and gossip about her. She stands on the symbolic scaffold for three hours, holding her baby while being exposed to public humiliation. Hester refuses to name the father of the child. Her husband is not present and is believed to be lost at sea.

Dignity

Hester’s proud dignity runs counter to Pearl, her wild child “elf,” whom Hester loves and fears. Pearl is a complex character and represents a form of punishment that Hester endures. Among critical characters in the story are the minister (“good”) and the physician, Hester’s older husband, who returns (“evil”).

Symbols and themes enrich The Scarlet Letter: sin worn inside and outside, good vs. evil, lack of materialism, dreams, night and light, meteors, knowledge, “the Black Man,” witches, civilization versus the forest wilderness, societal outcasts, and strong feminine identity. Hester forgives those who have punished her. She is generous to them with the little resources she has.

Shared Her Meager Resources With Others

Hester worked hard as a seamstress to support her difficult daughter.  By all accounts, she was a devoted mother. She shared her limited finances with others without expectations or recognition for her good deeds. Hester has forgiven the townfolks. Punished by her neighbors, Hester is a dignified person with a strong moral caliber. Instead, it is the community, acting as a mob, whose behavior is immoral.

Strong Female Independence

Hester Prynne is an early example of female independence in literature. As a single woman, she is bold, takes care of herself and her daughter, Pearl. She earns her own money through hard work and shares her money with others. She violated social expectations and cast out of the community. However, Hester’s ousting is freedom and redemption. She is free of social conformity. Ultimately, she returns to the town humbly and happy.

Final Thoughts

I have read and reread these books, finding so much more in these classics as time goes on. There are some books that we shouldn’t pick up until we are at least 40 years old. Sometimes characters such as these are like old friends you are visiting.

Indeed, The Beautiful and Damned, based on F. Scott and Zelda Fitzgerald,  is an excellent example of how not to handle money. At some point, after they were married, Gloria and Anthony decided that they wanted to have the best lives possible while they were in their 20s. They discussed not needing to save money for their old age because they expected to die young. F. Scott Fitzgerald died at 44 while Zelda was in a mental institution at age 30 and then killed in a fire at age 48.

For more: Personal Finance Lessons In Classic Literature

Have you read of these books? Any books you would recommend with similar themes? We are always on the look out for suggestions. We would like to hear from you!

 

Benefits Of A Generator When Outages Impact Your Home

Benefits Of A Generator When Outages Impact Your Home

“We Have Power!”

 Craig, my husband

How precious those words were when we regained utility services.  Our family, among many, endured a multi-day outage caused by Hurricane Isaias. It is truly one of the more disruptive events that can happen. Typically, you don’t get a lot of warnings when outages occur. The best you can do is to be patient and go with the flow (pardon the pun!). Then hope you are covered by an effective utility company that is on the ball.

With two houses in different locations, I thought we would finally reap the benefit of having two locations despite the fact we had dual outages. We quickly relocated our family to the rented house which had a standby generator. Little did we know that the owners’ generator wasn’t working. It only sputtered out error messages. At least the rented house had water but nothing else. I soon realized that we would have to empty our two stuffed refrigerators filled with fresh and frozen food, including meals I always prepare ahead of time. What an unfortunate waste! Suddenly buying things on sales didn’t feel like a bargain anymore.

Power Outages Are Pains In The A** But Keep Your Perspective

Yes, we had candles, flashlights, and other supplies. It was our first outage not counting brownouts. I was proud of our teens as they handled themselves quite well in the initial days. By the fourth day, they were getting anxious about being out of touch with friends, and having schoolwork to do. Having a puppy made things a bit harder for all of us, especially feeding time when we didn’t have yogurt for him.

However, it was important to keep our perspective. Falling trees hurt no one. People go through a lot more worse conditions as a result of emergencies. We were safe with temporary inconveniences like no toilets or showers, no wifi, TV, or lights. However, I wanted to understand what we can do about this in the future as we did have some costs to bear. Both Craig and I work from home with deadlines to meet but our computers were silenced by the power outage.

We will file for some recovery with our respective utility companies. Our budget took a hit as we had to spend more money dining out for all our meals; bought water and jugs to flush our waste, and gas for the generator we borrowed. The banks were closed during the first few days of outage though we had cash on hand. An emergency fund is particularly important to have for events like this. We suffered no damages to windows or house from falling trees.

Aging Electric Infrastructure Means More Outages Are Likely

When a power outage occurs, whole communities as retailers as well as businesses overall get impacted. No one cannot operate without electricity. Experiencing a power outage has become far more common in the US in the past decade as a result of our aging infrastructure. The US electricity grid was built in the 1890s and updated piecemeal as new technologies became available. Electricity is still our major power source.

According to the Department of Energy, 70% of our transmission infrastructure is over 25 years old. Gretchen Bakke, who wrote The Grid, said in a 2016 NPR Interview, said that our electricity grid has become increasingly unstable and underfunded.  Significant power outages averaged fewer than 5 per year from the 1950s to the 1980s. Since 2010, there have been more than 100 major outages annually. Bakke pointed out that renewable power sources have grown dramatically but our aging infrastructure isn’t capable of integrating them into energy sources.

Our electric grid cannot be fixed quickly and will require significant capital expenditures. Yet, not doing so, will guarantee that outages will become more commonplace. Modernization of the grid is key to the future of our economy. If we don’t update our grid, we will lose efficiencies, cost savings, ability to fully integrate wind and solar technologies, and be unable to provide better broadband internet to rural and poor areas. On the latter point, the pandemic has highlighted the digital divide that has existed for years.

Severe Weather Causes Outages

While hackers can impact our power systems, severe weather conditions such as hurricanes cause a significant percentage of power outages. As if the year 2020 wasn’t challenging enough with the coronavirus pandemic and a severe economic downturn, we now learn that the current hurricane season is expected to be “historic” as the most active in the 22-year history of National Oceanic and Atmospheric Administration (NOAA). NOAA just updated its forecast to “an extremely active hurricane season” through November 30th for the Atlantic Basin. They now expect as many as 25 named storms, a portion of which will become major hurricanes. I don’t think we need another historic event this year!

Should We Get A Generator?

The sad state of our infrastructure is a big problem that needs fixing on a broad scale. Other than using our voice and vote to get our grid in better shape, what can our family do to better prepare for more outages?

Towards the end of the ordeal, our friends, who had their power restored faster than ours, lent us their portable generator. It provided some relief. The wifi allowed us to communicate again and we had one of our refrigerators turned back on. Of course, our son, Tyler made sure that he could use one of the large screen TVs for his video games. Having some power back got us thinking about getting our own generator for our rural home.

Was this power interruption a once in a lifetime experience or could it happen more often? If the latter, does getting a generator make sense for us? We had to throw out a lot of food in two refrigerators and freezers that we had recently gotten as well as for supplies and dining out the whole week for a family of four. Suddenly a $750 portable generator starts to make sense. It fits into our budget and may give us peace of mind.

Related Post: Steps To Buying A Home Through Closing 

Benefits Of A Getting A Generator

 

1. Staying Comfortable And Safe During Emergencies

Having a generator would restore some of our daily routine activities quickly and potentially automatically. You can remain in your home rather than having to pay for a hotel. Depending on the size and type of generator, some of your basic needs can be provided, notably keeping the heater or AC working, power for the bathrooms (this is the hardest to lose), TV and cable connections, security systems, refrigerator, a few lights, and being able to use your computer. A generator is particularly important for families with health problems that may require the use of medical equipment. Simple things like being able to open your garage door and having a cup of coffee or tiny benefits I am grateful for. Having a backup generator provides some peace of mind. When you are without power, it is very stressful for you and your family, including your pets.

2. Maintain High Indoor Air Quality

Without a generator, indoor air quality deteriorates as open doors and windows will let in pollen, dust, dirt, and such. A generator is particularly helpful to keep your HVAC (heating, ventilation, and air conditioning) system running. HVAC systems bring in fresh air from the outside to provide better indoor air quality. This is an essential comfort for those with asthma or severe allergies. Within 48 hours, your food spoils and smells up your home. Also, high humidity can cause mold in your home.

3. Preventing Damage To Your Home

A generator allows your sump pump to keep working. This helps to prevent possible flooding in your home when there are heavy downpours or snowstorms. It can prevent pipes from bursting by maintaining power to your boiler in order to heat the house.  When power is restored after a few days, your refrigerator needs to be cleaned of its spoiled food. It is a lot of work and you may feel like you need to buy a new refrigerator. It keeps the water flowing for homes with private wells. In rural areas, generators are often needed to maintain electrical farm appliances and gardening.

4. Add Value To Your Home

Depending on the type of generator you get, it can add value to your home and help you rent it out. Typically, you will receive the greatest benefit from a system that provides coverage for your whole home and is a standby generator rather than a portable generator. Some insurance companies may give discounts on the homeowners premium if you have an automatic standby system.

Portable Generators versus Standby Generators

Less than 3% of American homes have standby generators while 12% have portable generators. Generac has 70% of the residential generator market although there are several other providers of these units.

Portable Generators

The cost for portable generators is significantly less than the standby generators, likely accounting for the higher percentage in US homes. The national average cost is $750 (ranging $200-$2,000)  for the gas-powered with about 5500 wattage.  These units vary by wattage with gas being the most common fuel type over natural gas, liquid propane, and diesel. The portable unit requires manual hookups using a number of extension cords that may add cost. An electrician can provide a transfer or switch to connect your appliances to the generator for $500-$800. There is no other installation as your unit should operate 20 feet outside of your home.

It is a manual system, easy to operate as our son, Tyler actually put it together for us.

Some portables have automatic shutoff features if it detects too much carbon monoxide.

How Many Watts Do You Need?

Power output is measured by wattage. The amount of wattage you should get is determined by how much coverage of your home and respective appliances you need. Consumer Reports says that 5K watts will cover the basics of a typical home though it really should be based on your family’s needs. There are units that go to 10,000 watts or more. The biggest portable I saw was 17,500 watts. To give you an idea of respective wattage, here are the required wattage:

  • Refrigerator – 600 watts
  • Sump Pump – 750-1500 watts
  • Portable Heater – 1500 watts
  • Window air conditioner – 1000 watts
  • Lights vary from 60 – 600 watts
  • Computers 60-300 watts

A portable generator can do the trick for some, but likely not for all of your needs.

The units hold 3-6 gallons of gas and have to be refilled often. (Motley fool) It is estimated that it takes 34 gallons of gas for average portable generator size for two days use. The price of a gallon of gas is low at about $2 now. When the unit runs out of gas, it stops working. This could be a problem as you don’t want your refrigerator to stop working.

The Drawbacks of A Portable Generator

While we find the portable generator is probably the way to go for our family, there are a few negatives to be aware of. As mentioned, portable generators will not restore every inconvenience so you need to figure what is most important to you. Your portable unit may use a lot of extension cords all over the house unless you have a transfer or switch. This may be unsightly for some people and pose a danger if you aren’t careful walking around.

You need to monitor the system periodically so it doesn’t run out of gas and stop running your appliances. The portable unit is not a good choice if you travel a lot. You don’t want to leave it running outside your home unattended. As it is noisy, your neighbors probably won’t appreciate you leaving it either.

Standby Generators

These units are far more comprehensive in their coverage of your entire home during an outage. They are automatic and will turn on upon the outage and off when power is restored. That means there should be no power interruption. The automatic feature eliminates the need for fuel storage as it is hooked up to an existing gas line. It has the potential to increase your home’s value and possibly getting discounts on homeowner insurance. On a personal note, the fact that the standby generator did not work as hoped in our rented home makes me a little biased against this kind of unit.

The Drawbacks For Standby Generators

For these reasons, standby generators are more expensive, ranging from $7,000 to $9,000 for an installed 10,000-watt generator. According to Remodeling magazine, comparing cost versus value, a $12,860 standby generator increases the value of your home by $6,940. That is a 54% recovery of your generator’s cost. The unit may take up significant outdoor space, require regular maintenance, and an inspection after installation. Like the portable unit, it is noisy when operating as well. You will have to run it on a periodic basis.

Final Thoughts

Our first major power outage that lasted a week was a drag on our family as it has been for many others. Unfortunately, we will likely see more power outages in the future. As a result of our experience, we are considering a portable generator as insurance. Losing food, having to dine out for every meal, and inconveniences were annoying in this difficult year. The larger issue is the aging infrastructure plaguing our country. It is partially the cause for outages as well as inefficiencies and the lack of broadband internet for many Americans. That has been part of the lesson learned I wanted to share in this article.

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13 Money Lessons From Warren Buffett’s 2020 Letter to Shareholders

13 Money Lessons From Warren Buffett’s 2020 Letter to Shareholders

Each year I read Chairman and CEO Warren Buffett’s annual letter to Berkshire Hathaway’s shareholders upon its release. For many reasons, I do so as a shareholder, an investor, a former equity analyst, and a professor. Teaching finance to college students the letters are a treasure trove and better than many textbooks.  They are enjoyable to read, and I learn a ton from them.

The 2020 letter provides insights into the company’s diverse businesses. These businesses represent a proxy for our economy. What makes the letter so special is that Buffett writes it himself, sharing money and investing lessons with his memorable wit and humor. Each year, Buffet aims his words at investors at every level.  He pretends he is writing to his two sisters, Doris and Bertie. They have a significant amount of shares.

This year’s letter had several new aspects, which contained some soul searching but no major surprises. Buffett and his partner in crime, Charlie Munger, are the oldest leadership team of Fortune 500 companies at ages 90 and 96, respectively. They recognize the need to be candid with shareholders about the company’s future without them.

13 Key Takeaways:

 

1. 2019 Was Not A Stellar Year For Berkshire’s Stock Performance

Berkshire’s stock underperformed the S& P 500 index, the market’s proxy, by 20.5 percentage points in a strong year for equities. This year’s performance was its biggest disappointment since 2009. Looking at its 55 years history, Berkshire compound annual return of 20.3% exceeded the S&P 500’s not too shabby 10%. While this is an excellent performance for any company, Wall Street’s “what have you done for me lately?” mentality raised many questions for Buffett. The company has been hurt by its lack of acquisitions, particularly in fast-growth areas like the technology sector.

The company’s operating earnings in 2019 were slightly down compared to a year ago. Berkshire Hathaway does not pay a dividend to shareholders who would have boosted returns to shareholders.

2. A Disciplined Acquisition Strategy

Acquisitions are a signature priority for the company. However, Buffett has had trouble finding an “elephant-sized” one. Buffett tried buying Tech Data, a technology distributor, but  Apollo Management bid higher and acquired the tech company.

Buffett uses three criteria for buying new businesses:

  • The business must earn good returns on the net tangible capital required for its operations.
  •  Berkshire’s unique acquisition strategy prefers to inherit strong and honest managers.
  • Buffett wants to pay a sensible price and will not enter into bidding wars.

Although they prefer to own 100% of the acquired company or at least a controlling interest, they have valuable non-controlling interests in many businesses. Those holdings are worth $248 billion based on the year-end 2019 market price. They represent long-term holdings of reliable companies include American Express, Apple, and Delta Airlines.

However, the accounting isn’t as favorable a contributor for their non-controlling stakes. Berkshire can only realize the dividends that Berkshire receives in operating earnings they report. However, they cannot include the proportionate retained earnings reported by these holdings. Dividend income from the ten largest holdings in 2019 amounted to $3.8 billion compared to its share of $8.3 billion for retained earnings.

 

3. Reinvestment In Diverse Productive Operational Assets Remains Top Priority

Berkshire Hathaway splits their controlling businesses into insurance and non-insurance operations. Together, they reflect diverse companies representing a tapestry of our economy. Buffett has acquired dozens of companies over the years. In the current letter, he analogizes acquisitions to marriages: “Joyful weddings — but then reality tends to diverge from prenuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift.” Almost poetic!

Although Buffett does not explicitly cite the significant disappointments, his commentary pointed to the original one. That dates back to early 1965 when he acquired Berkshire’s textile business, which received most of the capital. Buffett began acquiring companies, which received more of the company’s money. The textile’s losses became a drag on growth and eventually lost financial support. Of course, without that business, there may not have been a Berkshire Hathaway today. Today, Berkshire designates most of its capital to their companies that achieve good-to-excellent returns and less for those that perform poorly.

Top businesses that get superstar status in Berkshire’s portfolio are insurance operations,  followed by BNSF railroad and BH Energy acquisitions. The rest are Clayton Homes, International Metalworking, Lubrizol, Marmon, Precision Castparts, Forest River, Johns Manville, MiTek, Shaw, and TTI. They also own many smaller businesses.

4. Wind As A Major Energy Accomplishment

Berkshire Hathaway Energy has been very successful in charging lower energy rates. They realized efficiencies from converting wind into electricity. The company expects to be wind self-sufficient for its Iowa customers in 2021, far ahead of the other Iowa utility. Berkshire’s move to the wind is potentially well ahead of other utilities in the US. Positively, Berkshire’s energy business may take on more utility projects.

5. Valuable Insurance Businesses With Conservative Risk Approach

Berkshire’s property/casualty insurance businesses provide a lot of capital by “float” or “free money.” Float is an attractive aspect of the insurance business. The insurers receive premiums upfront from the sale of insurance policies. They make payment of claims which can stretch out over decades. In the meantime, the company invests the float money in conservative high-grade bonds. Given our low-interest-rate environment, the returns have been low for these financial instruments in recent years. Had the float been invested in lower-quality bonds or stocks with higher returns, Berkshire and its shareholders would have been bigger beneficiaries but at far greater risk.

Instead, Berkshire is sticking with a conservative investment policy for the float. Insurance can be a risky business. There have been significant catastrophes in the past, such as asbestos, Katrina, earthquakes, and tsunami in Japan. When they occur, it can be tragically devastating for human lives and significantly impact businesses unexpectedly.

6. The Compounding Power Of Retained Earnings

Buffett discussed an economist, Edgar Lawrence Smith, who had written Common Stocks As Long Term Investments in 1924 in his letter. Smith argued that stocks would perform better than bonds when prices rise, and bonds would deliver better returns when prices decline. However, the author himself admitted that the studies he was using did not prove his theory.

Giving support to Smith’s insights, John Maynard Keynes wrote in his review of Smith’s book: “I have kept until last what is perhaps Mr. Smith’s most important, and is certainly his most novel, point. Well-managed industrial companies do not, as a rule, distribute to shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from dividends paid out to shareholders.”

Before Smith’s book, stocks were considered speculative compared to bonds. Reading The Beautiful And Damned classic by F. Scott Fitzgerald written in 1922, the protagonist Anthony Patch had lived off his bonds, selling them off as his emergency fund as he had no other income. Stocks were not what gentlemen buy.

Think of the company’s retained earnings as its savings account compounding growth. This growth can be invested in new opportunities, whether to buy new companies or expand their holdings.

7. “If”

Buffett is a big fan of Rudyard Kipling’s poem “If and uses “If” when asked about predictions. When making forecasts, Buffett Cannot predict future interest rates, tax rates, or economic growth. Changes in these rates can cause stocks to have significant drops in the market of 50% or greater. That said, he remains an unflappable optimist about our country and the future of stocks for the long term. Equities are the better choice over fixed-rate debt securities assuming interest rates and corporate rates remain as they are now. Hard to predict significant “ ifs.

That said, equities perform better over the long term benefiting from compound growth. However,  you can do things to reduce your risk by not using borrowed money (e.g. buying on margin) to buy stocks. Control your emotions when the markets get rocky so that you don’t sell good stocks recklessly. Volatility in the markets happen regularly but weather the dips for the long term rather than sell out of nervousness. An emergency fund helps you maintain liquidity when the unexpected happens, such as a job loss.

8. Use Of Conservative Accounting Standards

Buffett and Munger refer to earnings as bottom-line net earnings, meaning after considering all income taxes, interest payments, management compensation, restructuring costs, depreciation and amortization, and home office overhead costs. Net earnings contrast to the often practiced adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is a much higher number than net earnings. However, Berkshire prefers net earnings, which is more conservative. Munger has often referred to the EBITDA profit metric as “BS earnings.”

High growth companies who are not year generating bottom-line earnings use EBITDA as a measurement. Wall Street bankers and analysts have endorsed EBITDA as alternative valuations for growth companies. Buffett is critical of companies that report earnings before “one-time events” such as restructuring and stock-based compensation costs. What he means is that these costs still need to be deducted from gross earnings. Some management doesn’t want to include these items as an expense, but as Buffett quips: “What else could it be–  a gift from shareholders?”

9. Buy-Hold Investment Strategy is A Longstanding Trademark

Berkshire has a significant collection of equity holdings. This portfolio is separate from the companies Berkshire controls. Here, Berkshire has ownership typically about 5%-10%+ stakes in substantial companies that deliver dividends and stock appreciation. Berkshire holds about fifteen positions thoughtfully bought and intended for long term. At the end of the year, Berkshire’s portfolio of $248.0 billion market value, well over its $110.3 billion costs.

This portfolio does not include Berkshire’s more significant holding in Kraft Heinz because it is in a control group. Kraft Heinz is one of his acquisitions that Buffett believes the company overpaid. One of his few mistakes. Overall, Buffett often is praised for his buy-hold portfolio diversification.

10. Berkshire Share Repurchases

Buffett and Munger will buy back shares if they sell at prices below their intrinsic value estimate and have sufficient cash. Berkshire bought back $5 billion in shares for about 1% of the company. They are reluctant to buy back shares solely for the appearance of propping up the stock. They have been critical of other companies doing that.

The management of their constituent companies has also repurchased shares, using their retained earnings. Repurchased shares boost Berkshire’s ownership percentage from the lower outstanding share count.

11. Has An Ample Emergency Fund

Berkshire maintains a high level of cash-equivalent securities, invested in US Treasury bills of $125 billion at yearend. They use debt sparingly with $19.9 billion.  Buffett admits to making expensive mistakes along with missed opportunities. The company always maintains a minimum of $20 billion to guard against any potential calamities. Holding this money is like an emergency fund for the company so they can have liquidity readily accessible. Berkshire would never want to sell any of their businesses to raise capital.

12. Planned Exits For Buffett And Munger

Neither management is going anywhere in the immediate future. They remain energetic and optimistic about the company’s future. The company is well known for its strong corporate culture throughout its many companies. That said, in preparation for Buffett’s eventual exit, he discussed the details of his will’s directives. According to Buffett’s directions, fiduciaries–executors and trustees–cannot sell any Berkshire shares right away. Both the Mungers and Buffett have most of their wealth concentrated in Berkshire shares.

Over time, the trustees will convert A shares into B shares annually and distribute them to various foundations. The higher-priced B shares are the original Berkshire Hathaway stock and have never gone through a stock split. A recent stock price for Berkshire A (BRK.A) was $343,449.00, while the B shares (BRK.B) are $229.33, a more accessible price for the average investor.  It will likely take 12-15 years to distribute after Buffett’s passing.

Buffett feels confident in his strategy despite the concentration of that much wealth in one stock. His faith in the company outweighs his need for diversification. That is not good advice for the regular investor, but hey, he is Warren Buffett. Buffett is aware that Investment banks may approach the Berkshire Board of Directors to change Buffett’s strategy. However, Buffett has a strong belief in his board. He has been critical of overpaid directors at other companies who do not buy shares with their savings except through grants. The need for board independence for Buffett has been a constant topic well before Sarbanes-Oxley law’s requirements.

13. “We Are All Duds At One Thing Or Another”

In a jab at directors he met through the years, Buffett said he would not have chosen them to handle his money or business matters. Adding, “They, in turn would never have asked me for help in removing a tooth or improving their golf swing. Moreover, if I were ever scheduled to appear on Dancing With The Stars, I would immediately seek refuge in the Witness Protection Program. We are all duds at one thing or another.”

Ajit Jain And Greg Abel Will Have More Exposure At This Year’s Shareholders Meeting

Jain and Abel –two prominent operating managers–have been touted by Buffett in recent years. Jain heads the insurance business, while Abel is part of the Berkshire Hathaway energy business. Buffett and Munger have not named Abel and Jain as successors. Buffett turned 90 on his last birthday (August 30), so it is only reasonable that investors encourage the company to make their decision official soon.

Final Thoughts

Warren Buffett has long been an investment icon, teacher, and generous philanthropist. His folksy letters to shareholders provide personal finance lessons in a manner of common sense. They are informative about the company’s businesses.  Buffett’s refreshing optimism about the future can be contagious. He owns up to mistakes and is self-deprecating with his wonderful sense of humor.

Previous Post: 15 Personal Finance Lessons From Warren Buffett

There are so many enjoyable stories about Warren Buffett. Do you have one you might want to share? We would love to hear from you!

 

 

 

 

 

 

 

 

 

How The Fed Rate Cut May Affect Your Loan Rates

How The Fed Rate Cut May Affect Your Loan Rates

“I think we do need to try to not just rely on the central bank to, in its wisdom, adjust interest rates, but allow for people to avoid being exposed to inflation risk.”

Robert J. Schiller

 

The Fed has recently cut its benchmark fed funds by one quarter percentage for the second time in two months. This is  the first time this has happened since the Great Recession of 2008-09.  After keeping this rate at historically low levels, the Fed raised rates nine times beginning late 2015 through end of 2018 to 2.25-2.50%.

Leaving aside whether it was a good move (I believe it was, by the way), what does a lower fed fund rate (reduced 0.50% to now 1.75%-2.00%), mean for consumers in terms of borrowing, saving and investing?

Yes, The Fed Cut Is Beneficial For Consumers

A short answer is that a reduced fed funds rate means lower loan and savings rates. The fed funds rate is the lending rate for banks and other financial institutions. Declines will likely be relatively small unless we see future Fed cuts. If you have a lot of debt outstanding, you may feel more relief.

However, the best result in lowering monthly payments is to improve your credit score. You will see greater incremental benefits.

While we can’t borrow at the fed funds rate, it directly and quickly influences the prime rate, the loan rate charged to the best creditworthy customers. Prime rate was  just lowered to 5.0% from 5.25%.  Other consumer borrowing rates are often pegged to the prime rate, London Interbank Rate (LIBOR) or Treasury yields.

However, There Are Two Factors That Determine Your APR

The major consumer financial products are mortgage loans, home equity lines of credit (HELOCs), car loans, credit cards and student loans. Two factors are important lenders use to determine your loan’s annual percentage rate (APR). They are:

  1. Federal Reserve action to modify the federal funds rate, which is out of our control and
  2. Your credit score which you can take steps to raise for lower borrowing rates.

 

What About Savings And Investments?

The savings account rates at banks will likely decline quickly by 25 basis points (or one quarter of a percentage point) matching the fed’s lending rate for intra-bank loans overnight.

Our investments in financial securities, notably short and long term debt and equity securities tend to move in the opposite direction of interest rates.Therefore, the cut, which was anticipated by markets, usually improves performance upon widespread speculation. This cut may fuel beliefs of future cuts by the fed.

Lower borrowing rates often mean higher consumer and business spending and therefore stronger economic growth.

Before we take a look at how a Fed cut may influence consumer financial products, a little background on the Fed may be helpful.

A Short Primer On The Fed

The Fed (formally known as The Federal Reserve System) is the central bank of the US. They regulate commercial banks and have the responsibility for conducting monetary policy. Its dual goals are full or maximum employment and stable prices, meaning  low inflation.

Through its monetary policy, the Fed uses its tools, notably the fed funds rate to influence money, credit, interest rates and  the US economy overall. The fed funds is the rate at which banks and other financial institutions can lend to each other overnight to meet mandated reserve levels set by the Fed.

The Federal Open Market Committee (FOMC) votes on whether to raise, lower or keep the fed funds rate unchanged. FOMC members meet is at predetermined dates about eight times a year. It is made up of the seven Board of Governors of the Fed, notably Chairman Jerome Powell, plus the Presidents of five fed district banks (including the New York Fed).

For more on why you need to understand the Fed, read more here.

The Fed affects every aspect of our financial lives.

You should have a working knowledge of what does, particularly if you are interested in all aspects of money and investing.

The Fed, through its monetary policy, influences our economy, our borrowing and saving rates, as well as our investments. They have a powerful role in controlling money supply based on economic and inflation indicators, factors that affect our economy as well as global markets.

The Fed’s role is multifold:

  • as the bank of last resort when other banks are unwilling to lend.
  • assess risk in our economy based on numerous variables.
  • a fiscal agent to the US Treasury supporting its securities auctions.
  • model for other central banks globally.
  • communicate publicly to explain their reasoning for their actions.

 

Mortgages: Fixed Rate or Adjustable Rates

The fed funds is a short-term rate but fixed rate mortgages are long term. When you borrow money to pay for your home purchase, you will likely choose between the conventional fixed rate mortgages or an adjustable rate mortgage (ARM).

If you are considering a home purchase, consider the seven steps to buying a home. Many potentials buyers are looking at the merits of renting instead.

Fixed Mortgages

Fixed rate mortgages are preferable for many home buyers. Your monthly payments are predictable for the length of your loan. Knowing your monthly amounts provides certainty and helps families to budget of one of the biggest costs.

Generally, 30 year mortgage rates are higher than the 15 year terms because of the longer time frame. Your rates will be highly influenced by your credit scores. Excellent scores of 750+ provide buyers with the lowest rates. I would encourage you to go for the shorter 15 year term as your total interest paid added to the home price is far lower.

Assuming you were applying for a 30 year loan, the average recent rate was 3.97% based on a range of 3.00%-7.84%. This range reflects best credit quality to fair (or riskier) borrowers. The 15 year average mortgage rate is 3.53% (on a range of 2.50%-8.75%).

Potential For Loan Refinancing

Those with the fixed rate mortgages will not be impacted by the Fed lowering the fed funds rate. However, if the Fed makes more rate cuts in the future, you may want to consider refinancing your mortgage if it makes financial sense for you. Refinancing costs additional fees. For potential buyers who have been on the fence in search for a new home, this cut could be an incentive.

Adjustable Rate Mortgages Will Benefit From Fed Rate Cut

Rates on adjustable rate mortgages (ARMs) change at different periods from annually, every 3,5, 7 or 10 years. They are reset based on either Treasury securities, inflation index or LIBOR. First time buyers often are attracted to ARMs as their initial rates are lower than the fixed mortgages.

A common ARM is 5/1, a hybrid mortgage, which is a 5 year fixed rate with annual rate changes after 5 years. A recent current average 5/1 ARM is 3.78% based on a range of 2.38-8.25% This may be attractive for someone expecting to sell their home or refinance to a fixed mortgage within 5 years. ARMs may fluctuate more quickly for those applying now, reflecting the Fed cut.

I have concerns with ARMs or any variable rate loans. They lack predictability and borrowers often don’t understand the terms of their agreements. Borrowers need to know when rates change and how they are impacted by rising interest rates. It is often difficult to budget their mortgage costs.

HELOCs Rates Will Decline If A Variable Loan

Most HELOCs are variable rate loans. This means that your month-to-month may fluctuate depending on the market interest rate. The benchmark is usually the prime rate. Some banks may offer a fixed rate option for customers who desire predictability and budget their costs. The typical fixed terms are 10 years and may range from 5-15 years.

Your HELOC loan is a credit line secured by the equity in your home and your creditworthiness. As your home serves as collateral like your mortgage, rates tend to be lower than credit cards. Once again, your credit score matters, along with Fed rate, which will determine your monthly payments.

How HELOCs Work

You may obtain an available line of credit of $100,000 but only draw $25,000 of the funds to pay your contractor. You will only pay interest on the $25,000. This provides  benefits for your credit score based on your utilization rate which you can read about here.

Recent average 5 year fixed HELOC rates are 5.09% according to Value Penguin based on a wide range of 2.75%-11.00% to reflect excellent to fair credit ratings. Variable rate is 5.51% (with a range of 3.50%-13.25%). The latter are higher rates and may indicate greater risk.

Generally, you may obtain your HELOC with the lender you already have your mortgage loan with. It is a convenient way to tap the equity in your home to get available credit to borrow money for remodelling your kitchen. A small reduction in your variable HELOC may help you incrementally.

Car Loans Rate Will Change Based On Fed Rate Cut

Most car loan rates are based on fixed terms pegged to Treasury yields. The average loan rate on a 60 month for new cars according to the latest Federal Reserve Consumer Credit report.  You are not likely to see any improvement on your existing loan rate or monthly payments. However, if you can refinance your car, you may recognize a difference in your monthly payments. On the other hand, your loan rate may vary based on three criteria.

1. New or Used Car

You will pay slightly more for a new car loan ( 4.30%) versus a loan for a used car (4.20%) or refinancing an existing loan (2.89%).

 2. Credit Quality

As with all loans, your credit score matters. Your loan rate may range from excellent or 750+ (4.30%), good or 650-699 (7.65%) or fair to poor on 450-649 (13.23%). Monthly payments may skyrocket with fair or poor credit.

Assume the average price of a car of $36,000 and a 20% down payment of $7,200 on a 5 year loan. Using a car loan calculator, your monthly interest payment will jump from $$534 per month with excellent credit to $$659 per month with a poor credit rating.

Total interest paid over the life of this loan will be $3,258 with excellent credit or $10,721 in total interest paid. Your car price with excellent credit amounts to $39,258 versus $46,721 when your credit is poor. Interest costs are the second biggest part of your total car price and may account for 25% or more of your car cost).

3. Loan Term

Term length varies from 36 months to 96 months with the longer time frame requiring the borrow to pay the highest rate. You should get to a shorter term auto loan so you are not shelling out a lot of money on interest. Take the shortest loan term on cars that you can afford. That is a good strategy for any loans you apply for.

The length of the loans have been getting longer and longer. Edmunds says the most common term is for 72 months, with an 84 month loan next in line. I am seeing ads for loans for as much as 96 months. That is an increase from 10 years ago when 60 months were the most common.A longer time frame means you are paying more in total interest cost on your loan.

What You Can Do About Lower Monthly Payments (Or No Payments At All)

Future car buyers may get reduced rates based on the latest Fed cut. However, your best path to a lower auto loan is to improve your credit score. Better yet, buy a used car outright without a loan. After years of car loans and leases (watch for hidden fees!), we are finally biting the bullet and buying older cars with more mileage for cash. Getting rid of these monthly payments are a longer term relief.

 

Credit Cards Rates Are Likely To Decline

Credit cards carry the highest borrowing rates of most consumer loan products. Their rates are linked to the prime rate which is quickly  influenced by the Fed’s benchmark rate. Interest rates will likely go down as a result of the lower prime rate. Of course, those high rates may not be a problem at all if you pay your card balances in full every month.

Unfortunately, the average credit card debt was $8,398 in June 2019. While the recent Fed reduction may trim some basis points off your APR, lenders are not required to lower rates when the Fed does so. However, there is a lot of competition for borrowers. If credit card issuers do, it will be marginal on on new cards. Lenders are far more willing to increase APRs when the Fed raises the fed funds rate.

Once again, issuers mostly look to your credit score for assessing your risk as a borrower. At the end of 2018, the average credit card rate for new offers were 19.24% and 14.14% for existing offers. The range for those with excellent scores were 14.41% to fair scores at 22.57%.  The national average rate did drop to 17.61% recently after factoring in the 50 basis point decline in the fed funds rate in 2019.

Good News For Student Loans

There is some good news on federal loans for undergraduate and graduate students and their parents for the 2019-2020 school year. This is the first time that these rates have dropped in three years. The rates for these loans were tied to the May 2019 Treasury auction for 10 year notes. Student loans have been a front page burning issue, likely to ramp up alongside the upcoming Presidential election debates.

Federal loans are fixed only with 10 year loans for school years as follows:

Type                                                       2019-2020                       2018-2019

Direct Subsidized (student)                        4.53%                              5.05%

Direct Unsubsidized (student)                    4.53%                              5.05%

Direct Parent Plus                                      7.08%                              7.60%

Graduates Unsubsidized                            6.08%                              6.60%

There is a cap on the amount you may borrow from the federal government for student loans. Undergrads may borrow up to $12,500 annually and $57,500 in total for student loans from federal sources. Graduates are capped at $20,500 yearly and $138,500 in total.

You need to consult the Federal Student Aid guide as the amount you may borrow depends on what year you are going into at school and your dependency status. These loans are not dependent on your credit score. For more on how to pay for college, see our family guide.

Due to federal loans being capped, most students will turn to private lenders where the credit scores of the students and parents matter. Loans may be fixed and potentially go for terms of 10-20 years or are variable. It is a good idea to pay back your student loans faster if at all possible.

The variable rates are influenced by changes in the prime or LIBOR plus the fixed margin tied to your credit score for your total rate. LIBOR rates tend to increase less slowly than the prime rate.

Banks may require a minimum credit score of 600-650 or better. So it is best to work on improving your credit report before borrowing. 24% of families in 2019 borrowed money from federal loans, private student loans, credit cards and other loans. 7% of students and parents each used their credit cards, loans from retirement accounts or other sources. 

Savings And Investing

Savings accounts at banks, including online banks, are likely immediately vulnerable to reduced rates after the latest cut in the fed funds rate. These rates have been low for years and not much of a source of interest income for savers as they have been in the past. However, these accounts did perk up after the rate increases in late 2018 enough to merit ads with “high yield savings rates.”

September 2019 rates have dropped in mid September after the August rate cut but likely not fully reflected. Average savings rates range from 2.00%-2.50%, with many banks requiring minimum amounts of $100-$10,000. Please read the fine print as there may be fees.

Savings accounts are great for accessibility to liquid funds such as your emergency money. Money market funds may offer slightly higher rates than saving accounts. They are great alternatives for safety and liquidity purposes. If the Fed continues to reduce rates, expect more trimming ahead. I don’t wish for high inflation but there was a time (1980-1982) that these accounts provided double digit returns with virtually no risk.

The Bull Case For Investing When Interest Rates Go Lower

Generally, when interest rates go lower, consumers and corporate borrowing increases. The lower interest rates may help some segments of our economy, like industrial companies. They have not participated in higher growth as much. Lower rates often results in strong economic growth. With low savings rates at 2.5% or lower, consumers have less incentive to leave money in the bank earning low returns.

Households may spend more by borrowing for a home or car. The reduction we saw in August and in September may be a small incentive for more buying of consumer assets.

Remember we have had a low interest rate environment with already low mortgages and HELOC rates. The housing and car markets have been strong in recent years because of lower borrowing rates. Those who may have wanted a house or car may already have done so. Can another 25 basis point encourage more buyers to look for new buyers? Maybe. Consumer spending has remained fairly strong particularly in the retail markets.

 

Better Long Term Returns From Stock Investing

I avidly participate in the stock market which are at or close to all-time highs. When the Fed reduces the fed funds rates, financial securities usually respond favorably or even upon speculation of an upcoming cut. Expectations of a stronger economy tend to push stocks higher. There are always risks that the market rotates from one issue to the next or one sector of stocks or another. To reduce risk, make sure to diversify your portfolio.

For example, US-China trade talks (on or off). There are some pockets of weakness being experienced in different sectors such as industrial companies such as Caterpillar, Fedex, and companies more dependent on strong global markets.

Households may seek higher returns from stocks which grow 8% annually over the longer term. Alternatively, they may seek higher yielding stocks such as ATT, Verizon or BP than they can earn in their savings banks.

Better yet, I would recommend those interested in stocks, to buy a low cost index fund. Vanguard funds are known for their low cost and choices in funds that focus on growth, value, blend or want something to mirror the market like S& P 500. Investors can also look at target rate funds.

 Final Words

The rate cut from the Fed was a welcomed event though it will likely have only marginal benefits for the average consumer. With lower interest rates it is cheaper to borrow than save. This usually leads to increases in spending. That is good for economic growth.

Still, households would realize even better financial health by improving their credit scores, reducing debt and spending within their means. This should be a priority so that you can invest more. Savings are great for liquidity but careful investing could provide better returns.

Have you noticed any reductions in your loan rates? Have the lower rates increased your consideration for house or car hunting? We would like to hear from you about your thoughts and experiences!

 

 

 

 

 

 

 

 

 

11 Reasons Why Investors Need To Understand The Fed

11 Reasons Why Investors Need To Understand The Fed

When the Fed speaks, investors listen…really closely.

The Fed (formally known as The Federal Reserve System) is the central bank of the US. The Fed regulates commercial banks and has the responsibility for conducting monetary policy to achieve its dual goals of achieving full or maximum employment and stable prices, that is low inflation.

Through its monetary policy, the Fed  influences money, credit, interest rates and  the US economy overall.  The Federal Open Market Committee (FOMC) is made of the seven Board of Governors of the Fed, including Chairman Jerome Powell, plus the Presidents of five fed district banks (include the New York Fed).

The Fed affects every aspect of our financial lives.

Those interested in personal finance and investing, in particular, should have a working knowledge of what the Fed does, particularly if you are interested in all aspects of money and investing.

The Fed influences our economy, our borrowing rates, our investments. They communicate with the public and add their voice of reason when our financial system is being threatened as it was during the Great Recession. They can also provide uncertainty to our financial markets through poor communications as Chair Jerome Powell when they raised rates in late 2018 amidst a stable, not rising, economy. The financial markets do not handle uncertainty well. Stocks react swiftly, declining at the end of last year,erasing strong gains.

 Powell Added Uncertainty About Future Rate Hikes Unnecessarily

Chair  Powell signalled  upcoming Fed action in last few months of 2018. Specifically, he suggested the FOMC  may be raising the fed funds rate a few times in 2019. The fed funds rate is the overnite borrowing rate between commercial banks and is the primary means by which the Fed adjusts their stance in monetary policy. While we can’t borrow at the fed funds rate, it directly influences other borrowing rates such as mortgage loans, car loans, prime rate, and affects securities such as treasuries and even stocks.

The S&P 500  responded negatively to the comments, dropping “as much as 8%”  in October-December 2018. Investors were concerned about potentially higher interest rates as well as trade policy initiatives, slowing global growth and partial government shutdown. Powell later backtracked from his earlier comments at the December 2018 meeting.

The latest Fed minutes from  late January 2019’s meeting indicated that the Fed has taken on “wait and see” attitude which has provided comfort to investors. But it was a reminder that the Fed has certain power over the money supply and credit in our country.

Understanding The Fed’s Role

1) FOMC’s regular meetings are scheduled well in advance and made public.

Individual FOMC members schedule speaking engagements and are watched very closely. Formally, the FOMC meets about eight times a year to determine monetary policy according to its dual goal mandate provided by Congress. They have targets for these goals, pointing to  longer term normal rates of unemployment of 3.5-4% and inflation rate of 2%. They assess our economy through examination of a broad range of economic and inflation indicators, economic forecasts and consideration of financial markets.

2) The Fed looks at all kinds of economic and inflation indicators.

 

A sampling of indicators:

  • Gross Domestic Product (GDP)
  • unemployment rates
  • industrial production
  • wage growth
  • retail sales
  • consumer and business spending
  • housing permits, starts, home prices
  • confidence surveys
  • S&P 500
  •  wholesale price index and consumer price index

They will also look at the economy from different points of view, such as  demographics (eg. minority communities), or regionally(different parts of the country). They look at all of these indicators to better gauge where we are in the business cycle.

These indicators are either:

a) leading indicators from every sector which predict future economic activity;

b) coincident indicators which are in line with the economy and

c) lagging indicators which tend to rise or fall a few months after business cycles expansions or contractions.

S& P 500 stock prices are an example of a leading economic indicator and may forecast a downturn or strong growth.

3)The Fed needs to know about external variables that they don’t directly control but could be impactful to our economy.

The Fed  looks at important factors that could affect our economy, one way or another, such as trade talks between the US and China, overall trade policies, the government shutdown, tax reform, hurricanes, and the global economies

4)The Fed makes assessments and manages risk, including to the financial system.

It is easy to criticize the Fed at having missed or having been slow to manage the risks that were building in the months leading up to the Great Recession of 2008-2009.  Investors experienced  significant losses in the financial markets (S& P was down about 55%). Housing prices went down about 20% in a fifteen month period.

Stock performance and housing prices provide Fed insight into the “wealth effect” of household net worth.  Losses in household net worth affects whether to continue or constrain their spending in our economy. Household spending accounts for about 65%-70% of our economy. Our financial health and confidence matters significantly to our economy.

5)The Fed’s monetary policy offsets changes in our economy.

When our economy is worsening and unemployment is rising, the Fed will adopt a more “accommodative” or “stimulative” monetary policy. They will take action to gradually reduce fed funds rates as a first step. Lowering this benchmark rate will influence  consumer borrowing rates, which will decline in tandem.

Lowered rates for auto loans, mortgages and credit cards tend to lead to higher spending and borrowing. Ultimately, it should stimulate the economic growth.

The Fed has a number of tools in their arsenal and in times of severe recessions will use all of them. The lower interest rates also benefit stocks which in turn, generally appreciate. The lower interest rates sometimes encourage companies to use their capital for corporate buybacks, expansion and mergers & acquisitions, all positive for stocks.

6) Higher economic growth may lead to stronger inflation as signals to the Fed to tighten money supply. 

When we are experiencing strong economic growth, it could fuel higher than normal inflation. The Fed’s action would be to tighten or constrain growth and often be referred to as “tight or “restrictive monetary policy”.  Otherwise, left unchecked, this economic expansion could lead to tighter credit and potentially higher inflation well above the targeted 2%.

Higher inflation reduces your purchasing power.  Wages will not keep pace with the inflation rate. Purchasing power is the amount of goods and services your income will buy, but your necessaries such as groceries, rent, transportation, and clothing, will cost more.

How higher inflation affects business spending

High inflation also has a dampening effect on your investments as companies pay more for wholesale prices, or experience higher interest rates when they borrow. Businesses cannot necessarily pass these higher costs to the consumer, though they will try. They will postpone or cut their capital expenditures which may mean less future hiring.

One benefit of higher interest rates is there are more incentives for households to save money at the bank at higher yielding rates. With raging inflation in the early 1980s, banks were literally throwing out double digit savings rates at their banking customers.

7) The Fed has other tools it can use to push the economy into the direction of its stated goals.

The Great Recession was more severe than previous ones.  The Fed aggressively utilized its tools.  The Fed is always purchasing (adding liquidity to financial markets) or selling (tightening money supply) treasury securities from commercial banks.

For example, in a weakening economy, the Fed  purchases government securities from the balance sheets of the commercial banks in exchange for money to provide liquidity to the public. But during the Great Recession, the Fed was more aggressive in their purchases.

They adopted quantitative easing (QE) which are large scale asset measures. They essentially bought predetermined amounts of government bonds and other financial assets, including mortgage-backed securities. This in in contrast to buying conventional short-term bonds to keep fed funds at its target value.  powerfully put a lot of needed cash into the banks to stimulate more lending.

8) It took three phases of QE over four years to stimulate our economy.

As a result of QE1, QE2 and QE3, the Fed had a lot of those government securities accumulated in reserve  on their balance sheet and they have been working to reduce the amount. According to their latest minutes, the Fed reported that the peak amount of $2.8 trillion in October 2014 has declined by $1.2 trillion.

Investors had been concerned that further declines would act to “tighten” our economy, creating reduced credit even though we are experiencing low inflation. The Fed has indicated that reserves may soon approach efficient levels later in 2019.

9)The Fed works with the US Treasury, the latter being responsible for US fiscal policy.

The US Treasury also needs to raise capital to fund the US budget policy as part of its fiscal policy. They work interdependently, with the Fed serving as US government’s banker. As the largest borrower in our economy, the US Treasury raises capital through issuance of treasury securities through a weekly auction.

The large budget deficit on its own puts upward pressure on interest rates, so Fed looks at this budget deficit closely.

10)The Fed is also known as a bankers’s banker, or banker of last resort.

They will lend money at the discount rate (set above the fed funds rate) to our commercial banks in times of liquidity crisis. Both the Fed and US Treasury worked feverishly as Bear Stearns, collapsing in April 2007. Their hedge funds were exposed for holding high risk subprime mortgage securities securities. JP Morgan Chase bought Bear Stearns well the previous value.

After Bear’s dismantling, on September 15, 2008, Lehman Brothers collapsed, filing for Chapter 11 bankruptcy. This event nearly caused systemic risk to our entire financial system.

I highly recommend the book “Too Big To Fail” by Andrew Ross Sorkin. He chronicles the unimaginable circumstances of the Fed, the Treasury and Congress racing to save some of our oldest financial institutions. By the way, the movie is pretty good if film is better for you.

11)The Fed is the role model for central banks around the world.

Other central banks look to the Fed and the action they take. The Fed in turn also looks closely at the actions of the central banks of major economies, as well as taking into consideration international issues, such as trade policies, global growth and Brexit. The Fed looks at the US dollar and its relation to major global currencies. A weak dollar, on its own, tends to be beneficial to our economy as US exporters benefit against their global competitors. The Fed looks at action taken by global central banks and their currencies as well.

Want to become a  Fed watcher? It pays to be at least aware of what the Fed does and says given its potential impact to our economy and financial markets. Everything you may have wanted to know about the Fed and how it may affect your financial lives. The next important FOMC meeting is coming March 19-20. Take a look at the markets in the days before the meeting, during and especially at 2:00 pm when Chair Jerome Powell announces the FOMC decision. When the Fed speaks, investors pay attention!

Where were you when Lehman Brothers was collapsing? Do you recall the impact of the Fed on the financial markets at any time? We would love to hear from you!

 

 

 

 

15 Personal Finance Lessons From Warren Buffett’s Latest Annual Letter To Shareholders

15 Personal Finance Lessons From Warren Buffett’s Latest Annual Letter To Shareholders

Chairman and CEO Warren Buffett’s annual letter to Berkshire Hathaway’s shareholders for 2018 results was recently released.

The letter is a treasure trove of personal finance lessons.

Business and investment savvy Buffett has long been an American folk hero whose optimism for the financial markets, American business, and America herself has been cause for celebration.

As a Professor teaching business students, I have used Buffett’s shareholder letter for lessons on Berkshire’s various businesses. These diverse businesses represent a tapestry for our economy, stock investment strategies, accounting standards, business ethics, management style, and his indelible wit and humor.

As a Wall Street analyst, I often read Buffett’s letter. But there was no comparison.  Buffett writes his own letter every year, edited by his friend, and his contemporary, and journalist (former editor of Fortune) Carol Loomis.

At age 88, Buffett along with his older compadre Berkshire’s Vice Chairman Charlie Munger, age 95, is the oldest leadership team of Fortune 500 companies, providing superb insights with an energy level that could and does challenge far younger management teams.

15 Personal Finance Lessons:

1. Berkshire’s outstanding stock price performance is the best measure of the company’s business.

In its 54 years history (with Warren Buffett at the helm) Berkshire compound annual return of 20.5% exceeds the S& P’s not too shabby 9.7%. In 2018, Berkshire outperformed the S&P by 7.2 percentage points. Indeed, Berkshire stock beat the market 38 times out of 54 years, a great record for any company.

 2. Diversification is a hallmark of Berkshire’s success.

Just like any stock portfolio, Berkshire’s holdings reflect diverse businesses while providing insights into the health of our overall economy. Buffett’s prowess in buying wonderful companies “at sensible prices” is well known in both insurance and non-insurance businesses, such as GEICO (in 1976) and Johns Manville (in 2001), the latter after having been troubled by asbestos lawsuits.

Five Groves

Typically, Buffett buys 80%-100% controlling interests of these businesses. In this letter, Buffett likened his businesses to economic trees, though imploring shareholders to “focus on the forest-forget the trees.” Berkshire’s businesses are in five groves, from twigs to redwoods.

The largest grove is the huge collection of insurance operations. However, the company’s most valuable groves are the largely acquired diverse non-insurance businesses,  including from largest: BNSF railroad, BH Energy, Clayton Homes, International Metalworking, Lubrizol, Marmon, Precision Castparts, Forest River, Johns Manville, MiTek, Shaw, and TTI. They also own many smaller businesses.

 3. Conservative accounting standards and disclosures are favored.

Buffett refers to earnings, as bottom line or net earnings. This means earnings after taking into account all income taxes, interest payments, management compensation, restructuring costs, depreciation and amortization, and home office overhead costs. This is, in contrast, to often practiced adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). The latter results in a much higher number than the net earnings that Berkshire always uses and is more conservative.

The use of the EBITDA is typically deployed by high growth companies that do not focus on earnings. The practice has been endorsed by Wall Street bankers and analysts to sometimes drive investors to consider alternative valuations for growth companies.

Buffett is critical of companies that report earnings before “one-time events” such as restructuring and stock-based compensation costs. What he means is that these costs still need to be deducted from earnings. Some management don’t want to include these items as an expense, but as Buffett quips: “What else could it be–  a gift from shareholders?” Buffett’s use of the quintessential quote of Lincoln’s is fitting: “If you call a dog’s tail a leg, how many legs does it have? Four, because calling a tail a leg doesn’t make it one.”

 4. Business ethics are strong.

Berkshire Hathaway’s “Code of Business Conduct and Ethics’ is not part of the company’s shareholder letter but worth inspection. It can be downloaded from the company’s website. The letter stressed the desire of corporate management to meet Wall Street expectations to be so great that it has led to ‘bad corporate behavior” as companies felt the pressure to hit quarterly expectations.

Long term perspective

Berkshire takes a longer term perspective than most companies. As Buffett writes: “What starts out as an “innocent” fudge in order to not disappoint ‘the Street’….can become the first step toward full-fledged fraud..” (As an equities analyst, I still cringe at the amount of fraudulent carnage I saw among the corporate management I trusted. I also was a casualty at Drexel Burnham at an early stage of my career..but that’s a story for another day).

Buffett and Munger have always communicated directly and worked for shareholder-partners, rather than analysts. Buffett used the letter to point to the company’s long term strategy designed for their longstanding shareholders, rather than temporary shareholders who buy and sell Berkshire shares for a quick trade. Berkshire Hathaway maintains a different culture throughout its subsidiaries and does not seek to hit analysts’ short term estimates for the company.

 5. Berkshire Hathaway does not have a company-wide budget.

It does not prepare monthly earnings reports or monthly balance sheets. What? Unlike its Fortune 500 brethren, the holding company has few employees, and depends on its terrific companies to report results to their parent. However, Berkshire instills a culture that looks at long term, not short results. Buffett regularly views monthly reports of most subsidiaries but reviews earnings and financial position on a quarterly basis.

6. Tax reform benefits were released as the corporate tax rate was lowered to 21% from 35%.

Last year’s tax reform passage was beneficial for Berkshire Hathaway as for many companies. Buffett pointed to how the US government receives dividend payments from Berkshire in annual tax payments. In 2018, one of Berkshire’s larger companies (its utility business) passed that savings directly onto customers.

 7. Buy-Hold investment strategy is a trademark of Warren Buffett and Berkshire Hathaway.

Berkshire has a significant collection of equity holdings. This portfolio is separate from the companies Berkshire controls. Here, Berkshire has ownership typically about 5%-10% stakes (though stakes like American Express are higher than 10%) in very large companies which deliver dividends and stock appreciation. There are fifteen positions thoughtfully bought and intended to be held long term.

At the end of year, Berkshire’s portfolio had a market value of $172.8 billion, well over its $102.9 billion cost. This portfolio does not include Berkshire’s bigger holding in Kraft Heinz because they are in a control group. Berkshire has taken a significant hit to its valuation given that Kraft Heinz’s stock price caused by Kraft’s fourth quarter results.

The Kraft Heinz Issue

Kraft Heinz also disclosed that the Securities and Exchange Commission sent a subpoena to Kraft relating to its accounting practices. This is not usually good news. This is one acquisition that Buffett likely believes the company overpaid. One of his few mistakes. Overall, Buffett often is praised for his buy-hold portfolio diversification. He is also known for his preference of low-cost index funds (see below), rather than the higher fees charged by many investment management firms.

 8. Berkshire remained a significant repurchaser of its own shares.

Company management will repurchase shares at prices above their book value (cost) but below their estimate of intrinsic value.  The management of their constituent companies will also repurchase shares, using their retained earnings. This boosts Berkshire’s ownership percentage from the lower outstanding share count.

The use of the company’s capital to buy back their shares has become something of a political football as some politicians and pundits have expressed that companies should use that capital for wage growth and other sources. As a capitalist who has been generous by dedicating the vast majority of his wealth for charitable causes, Buffett seems to be unfazed the day-to-day news.

 9. Berkshire has an ample emergency fund.

Berkshire maintains a high level of cash-equivalent securities, including US Treasury bills of $112 billion at the end of 2018. Buffett admits to making expensive mistakes and has missed opportunities. Berkshire could also take an equity hit if investors flee the market  and it also has some risky businesses. To guard against any potential calamities, the company will always maintain a minimum of $20 billion. Berkshire will never want to sell any of the businesses which are core to Berkshire itself.

 10. Berkshire uses a disciplined approach to risk, using debt sparingly.

Berkshire’s property/casualty insurance businesses provide a lot of capital by virtue of “float” or “free money’  as they receive premiums upfront from the sale of insurance policies for payment of claims later on. Assessing insurance risks carefully doesn’t mean there couldn’t be mistakes. Events like Hurricane Katrina are risks. There is intense competition in this business and over time its float is expected to decline but in the meantime, it gives the company financial flexibility.

For funding, Buffett prefers equity, and Berkshire stock has been an able means of capital.   Buffett has used little debt personally and does not favor using debt for acquisitions. The unpredictable nature of times when credit disappears and holding debt can be painful. Buffett says, ” Rational people don’t risk what they have and need for what they don’t have and don’t need.” A personal finance gem!


 

11. Like traditional IRAs, Berkshire defers tax liabilities. 

Berkshire has significant amount (close to $15 billion) that arises from unrealized gains in their equity holdings. These liabilities are accrued at the now 21% corporate rate and will eventually be paid at the prevailing rate when the investments are sold. So it works as an interest-free loan that allows the company to make its money work. When you save money in your traditional IRA  account, you are saving money tax-free, deferring taxes until you begin to withdraw at age 59.5 years.

 12. The magic of compounding interest.

Berkshire’s strategy of long term holding of businesses and equity holdings that has resulted in compounding interest has been a huge benefit. Retaining all earnings that can be used to buy more companies has allowed Berkshire to grow into the financial behemoth it is now.

Using the example of $114.75 that Warren Buffett infamously used at age 11 in 1942 (77 years ago) to make his first investment, had he put that amount into a no-fee S&P index fund, with all of the dividends reinvested, it would have grown to $606,811 on a pretax basis on January 31, 2019, a gain of 5,288 for 1.

Buffett used a different example, using a $1 million investment made by a tax-free institution such as a college endowment fund, which would have grown to $5.3 billion. However, if that institution paid a 1% to investment managers (a frequent peeve of Buffett’s) its gain would be halved. Powerful lessons here.

 13. The American Tailwind

. Warren Buffett has never hidden his enormous optimism and respect for America. He referred to three periods of 77 years since George Washington’s installation as President and founding of our country. The first two periods (up to 1942) saw America grow into the most powerful nation on earth but faced tough challenges amid the losses in World War II and continues to be challenged today.

To prove America’s endurance and the reason to continue to invest, he used the apt example of government budget deficits. Our national debt has increased 400-fold since 1942, or 40,000%. Buffett pondered: “Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency.

To “protect” yourself, you might have eschewed stocks and opted instead for 3.25 ounces of gold with your $114.75.”  The punchline: your gold would be worth $4,200, less than 1% of what would have been realized from the unmanaged investment in American business. Buffett’s message: have faith in America and long term buy-hold stock investing.

 14. Savings.

As a result of savings and investments, US household wealth is estimated to be $108 trillion according to the latest Federal Reserve. Buffett and Munger acknowledge their success has been a product of the American Tailwind. In a humorous quip, Buffett wondered whether he and Munger in “their old age” would become consumers rather than investors. My guess would be “no, of course.”

15. Older age doesn’t mean you stop being productive.

Berkshire Hathaway has the oldest senior management team among the top Fortune 500 companies. Warren Buffett is among the wealthiest and generous CEOs in the US and globally. He doesn’t have to continue to work, read 500 pages daily, and contribute to shareholders and to society. Buffett and Munger are refreshing in sharing their long term views. They are American icons who still have a lot to do.

 Berkshire Hathaway’s Annual Shareholder meeting is on Saturday, May 4, 2019. You can attend if you are a shareholder or you can obtain a pass ahead of time. The event begins the evening  It takes place in downtown Omaha where both Warren Buffett and Charlie Munger will field questions and answer them fully, not partly as is often the case. Yahoo will webcast the Saturday meeting, going live at 8:45 AM.

Beside being a mecca for investors, it is a tremendous shopping day filled with company-backed products. One question that will likely be raised and addressed perhaps by a twinkle, is when will Warren Buffett and Charlie Munger step down and announce their successors? There are two important prospects and internal management—Ajit Jain and Greg Abel–touted increasingly in this year’s letter. My guess? Buffett and Munger seem to be having too much fun at the moment to step aside at the pre-announced date.

There are so many enjoyable stories about Warren Buffett. Has Buffett influenced you or your investing in any way? Do you have one any you might want to share? We would love to hear from you!

 

 

 

 

 

 

 

 

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