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The Key Personal Finance Lessons from Warren Buffett's Letter to Shareholders

Introduction

Every year, the legendary American investor, chairman and CEO of Berkshire Hathaway, Warren Buffett, writes a letter to his shareholders. While it is a rundown of what happened in the company in the year, Buffett can’t help but leave trails of wise speaks in these letters. For almost six decades, his letters have been illuminating investors about different financial issues, ranging from gold and interest rates to value creation.

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The Big Personal Finance Lessons

1. Cash is King

Everyone has heard the saying “Cash is King”. It speaks of how liquidity is an important aspect of managing one’s personal finance. Having money in other instruments such as stocks or bonds might be a good investment strategy, but in times of need, it is liquid cash-equivalents that actually come in use.

This is one of the major takeaways from Warren Buffett’s letter. Berkshire Hathaway has cash and cash equivalents of $144 billion on its balance sheets. Of this, $120 billion is held in short-term US Treasury Bills, maturing in less than a year. Buffett’s target, he explained, is to keep at least $30 billion in cash equivalents at all times.

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2. Don’t Invest Unless There is a Clear Investment Opportunity  

If you notice, there is quite a large difference between the threshold of cash that Warren Buffett wishes to hold for Berkshire Hathaway compared to what is actually being held. He attributed this to a lack of exciting opportunities to invest in, among other things. As an extension of the previous lesson, this can be interpreted as holding your horses till you find an investment opportunity that’s worth betting your money on. If there are no good long-term opportunities in sight, then it is better to keep your excess money in short-term investment instruments until an opportunity shows up.

3. Invest in Value, Not Price

Price is what you pay, value is what you get. For years, Warren Buffett has followed this mantra to get to where he is. He has always deployed his surplus cash to buy valuable businesses when the price is low. That’s the same strategy you must follow in your personal finance investment journey as well. Do not rush to invest your excess money in equities. Instead, focus on finding investments that are reasonably valued. If you invest in equities just because you have excess cash, you may end up buying shares at the wrong time and paying an unreasonably high price for it.

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Takeaway

Personal finance is all about making the right decisions at the right time. Warren Buffett has constantly been in the world’s top 10 richest people through his smart decision-making. As evidenced by his recent letter, the top takeaways have been to maintain enough cash reserves to take advantage of any investment opportunity that shows up. Without enough liquidity, the right investment opportunities can pass you by. While direct investing might not be for everyone, to become a meaningful investor, one must have enough cash at their disposal to invest when the right opportunity comes by.

Sources

Cash and cash equivalents of $144 billion - (source – The New Indian Express as of 28th Feb 2022)

$120 billion is held in short-term US Treasury Bills - (source – The New Indian Express as of 28th Feb 2022)

$30 billion in cash equivalents at all times - (source – The New Indian Express as of 28th Feb 2022)

 

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