How Warren Does It

Available at Amazon.com!

To our list of the top-four subgames of financial independence, rental, dividend stocks, covered call options and business, I also might add Warren Buffett style investing. Although this really triples down on the stock universe of asset classes, I highly recommend studying Buffett’s methodology and seeing if it fits in your wheel-house. Buffett after all is a very successful investor, garnering returns of 20+% over a thirty year period. This is what his investment methodology looks like in our paradigm:

Warren leaves the money in the investment so it can continue to snowball at a high rate of return, in excess of 20%. His financial independence comes from his $100,000 salary from his company. Although his salary pays his bills, he does not believe in taking a huge salary because he would rather let the money stay in the investment, the various companies he owns in this case, and allow the retained earnings to increase his net worth. Warren Buffett believes in investing in good companies with consumer monopolies that can effectively reinvest their earnings into the company and continue to generate persistent return on equity of 20+%. If they cannot reinvest then a stock repurchase is an ideal option as well as the acquisition of a complementary, company with good economics, a consumer monopoly and good ROE.

So, not only do Warren’s financial statements mirror the previous pictures, so do the companies that he invests in. He cannot justify taking the money out. For argument’s sake, let’s say the companies he invests in generate a 25% ROE and thus, Berkshire Hathaway generates a 25% return. Warren could take the money out and buy a new sports car which will decrease in value by 50% over the next few years, or he can leave it where it is, not invite the tax man to the party by withdrawing, and continue to snowball the capital at 25%. Thus, he is a pure net worth capitalist, optimizing the growth of his capital which has grown to over $40 billion.

In our context Warren is financially independent because of the $100,000 salary he pays himself. Everything else is left to snowball. He does not want cash flow to buy boats, fancy cars or houses. He wants it to grow. You can treat your financial model the same way if you wish. Generate and withdrawal enough to be financially independent. Reinvest the rest at your own personal hurdle rate.

Again, Not Every Financial Independence Game is Created Equal

In the following chapters I will go into greater detail on the varying games of financial independence. Your job, should you choose to accept it, is to identify which ones best suit you. Ideally, you will find a little piece of yourself in each asset class and can invest across asset classes, but it is not necessary. Donald Trump is not a big stock guy just as Warren Buffett is not a real estate investor. Identify your strengths and go with them. Outsource your weaknesses.

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Building a Small Business That Warren Buffett Would Love,available atAmazon.comorBarnesandNoble.com.

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