“A little personal history may partially explain our extreme aversion to financial adventurism” -Warren Buffett 2010 Annual Report
Image Credit to Carl Richards and the Bucks Blog Post: Investing Is Not Entertainment
While doing some research for a blog post I came across a great story from Warren Buffett that he shared in the 2010 Berkshire Hathaway Annual Report. The story shares a lesson from Ernest in 1939 emphasizing of the importance of keeping a reserve fund. The reserve or emergency fund has a purpose and although it may seem with the low rate environment we are experiencing today that investing those funds in riskier assets is a better idea, Ernest shares, “Forget it — the mental satisfaction of having $1,000 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize quickly.”
$1,000 in 1939 is equivalent to $9,182 today at an assumed 3% inflation rate.
[notice]A critical component of a financial plan is not only laying out your goals but to put safety guards in place in order to ensure you can weather market and life fluctuations. The riskier your lifestyle or cash flow, the larger the reserve is needed.[/notice]
A little personal history may partially explain our extreme aversion to financial adventurism. I didn’t meet Charlie until he was 35, though he grew up within 100 yards of where I have lived for 52 years and also attended the same inner-city public high school in Omaha from which my father, wife, children and two grandchildren graduated. Charlie and I did, however, both work as young boys at my grandfather’s grocery store, though our periods of employment were separated by about five years. My grandfather’s name was Ernest, and perhaps no man was more aptly named. No one worked for Ernest, even as a stock boy, without being shaped by the experience.
On the facing page you can read a letter sent in 1939 by Ernest to his youngest son, my Uncle Fred. Similar letters went to his other four children. I still have the letter sent to my Aunt Alice, which I found – along with $1,000 of cash – when, as executor of her estate, I opened her safe deposit box in 1970. Ernest never went to business school – he never in fact finished high school – but he understood the importance of liquidity as a condition for assured survival. At Berkshire, we have taken his $1,000 solution a bit further and have pledged that we will hold at least $10 billion of cash, excluding that held at our regulated utility and railroad businesses. Because of that commitment, we customarily keep at least $20 billion on hand so that we can both withstand unprecedented insurance losses (our largest to date having been about $3 billion from Katrina, the insurance industry’s most expensive catastrophe) and quickly seize acquisition or investment opportunities, even during times of financial turmoil.
The information in this article is not intended to be tax and/or legal advice and should not be treated as such. You should consult with your tax advisor and/or attorney to discuss your personal situation before making any decisions.
Additionally, If you are looking for additional help, seek help from a CERTIFIED FINANCIAL PLANNER™ Professional that can look at your individual situation holistically