Warren Buffett’s top 5 rules to live by
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Warren Buffett is widely considered to be the top investor of all time.
During the 54 years he has overseen Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), Buffett has generated a 20.5% annualized return for his fellow shareholders. Despite these statistics, the famed billionaire is best known for his ability to distill investment ideas into simple, memorable sound bites, and Uncle Warren’s homespun advice continues to ring true.
In this column, we show how Buffett’s humble investment wisdom can be applied to the financial decisions physicians make every day.
“Rule number 1: Never lose money. Rule number 2: Don’t forget rule number 1.”
It is widely known that Buffett himself has famously lost billions many times over his career, including a $23 billion loss during the financial crisis of 2008. If this is the case, how can anyone follow Buffett’s Golden Rule?
The purpose of this first principle is not to suggest that you can’t ever lose money, but rather to underscore the need for capital preservation above all other priorities when allocating money. Buffett is simply referring to the mindset a sensible investor should cultivate when making financial decisions: Don’t be frivolous by failing to do homework, don’t gamble and, above all else, never go into financial decisions thinking it is OK to lose money.
For physician investors, prioritize capital preservation in all decisions that affect your wealth or your practice’s health. For instance, when assessing your personal or ancillary practice investment opportunities, any investment that has a high upfront cost or associated fees with questionable return on investment should be scrutinized very carefully.
Similarly, from a physician lifestyle perspective, this means keeping your spending habits in check. Buffett, who still lives in a modest house worth 0.001% of his wealth, famously once said that “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” Be mindful of what you and your family need and don’t need. Anything above that should be allocated for savings and investments, as capital preservation will always be the most important factor in wealth creation.
Just like capital preservation is paramount to wealth creation, knowing when to cut your losses is equally as important. Physicians too often fall into the trap of doubling down on risky investments that just don't pan out as expected. Whether it is a bad stock pick or an ancillary service line for your practice that continues to draw money, don’t continue to throw good money after bad if the investment continually loses money.
“Never invest in businesses you can’t understand.”
Buffett once said, “Risk comes from not knowing what you are doing.” As a physician, this rule should make a lot of sense. Whether it is choosing a stock, a partnership investment or other equity offering, always put your money in transparent investment choices you can understand fully and articulate readily.
“If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”
Buffett famously said at Berkshire Hathaway’s Annual Investor Conference that “Our favorite holding period is forever,” and “The stock market is manic depressive.” As a physician investor, there are many benefits to this style of thinking when it comes to managing your wealth portfolio. For starters, buying and holding investments does not incur taxable events, allowing the investor to reap the rewards of compounding much more effectively. Second, thinking of each investment as a long-term partnership as Buffett does allows you to more effectively tune out the day-to-day noise the financial news industry generates.
“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
If you develop a long-term time horizon for your personal investments, you will quickly realize the truth behind this Buffett adage. When Buffett first laid out this statement, he was referring to lessons learned in value investing from his famed mentor, Benjamin Graham. The adage holds true because companies with fair prospects valued wonderfully will become poor investments once the valuation catches up — a one-time event. In comparison, a wonderful company valued fairly will continue to be a wonderful investment for years to come. In other words, investments that have built-in advantages, or “moats,” will always win out over the long term.
Millennial physicians can apply this principle to any big investment decision in their lives, not just stocks. For instance, when purchasing a home, look for a property that has a long-term advantage such as being in a good area or fast-growing part of town. When deciding in which practice to invest your time and skills, choose the job that has the best long-term prospects for your career and personal happiness rather than one that simply has the highest starting salary.
“It takes 20 years to build a reputation and 5 minutes to ruin it.”
Even though Buffett is in the financial industry, his advice on reputation rings true for all physicians. Uncle Warren once told his employees “Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.”
Your reputation as a physician is in many ways your brand. For millennial physicians, this principle can be applied by always appreciating how your decisions, both financial and non-financial, can impact your reputation. Just as a company’s brand will be vital to its success, a physician’s reputation will play a pivotal role in how his or her career unfolds. Cultivate it and protect it as Buffett would do.
Despite being in a completely different track of life, physicians can learn a lot from the most famous investor of all time by applying his wisdom to many decisions we make every day.
Reference:
- Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or ebook formats by texting HEALIO to 47177 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
For more information:
Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Ill. He can be reached at sanjeevbhatia1@gmail.com.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm, OJM Group, www.ojmgroup.com. He can be reached at mandell@ojmgroup.com or (877) 656-4362. You should seek professional tax and legal advice before implementing any strategy discussed herein.
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