Warren Buffett is one of the world’s wealthiest people with an estimated net worth of over $100bn. He is considered one of the best investors ever to have lived. Could your child be the next Warren Buffett? That’s what you're going to find out in this blog.
Who is Warren Buffett?
Let me give you a bit more background to Warren Buffett as many of you may not have heard of him before.
Warren is 92 years old and still lives in Omaha in the US where he was born. His nickname is the ‘Oracle of Omaha’.
He is the Chairman and CEO of an investment company called Berkshire Hathaway. His vice-chairman is his friend Charlie Munger who is 98 years old. They have been working together since taking over Berkshire Hathaway in 1965.
Berkshire buys companies which Warren (and Charlie) believe are very well managed and will grow over the long term. Sometimes they buy entire companies and other times they just buy large stakes in other companies. For example, Berkshire Hathaway is one of the biggest shareholders in American Express, Bank of America, Apple and Coca-Cola.
Warren and Charlie have been investing for a long time and still own many of the companies they bought nearly 50 years ago. Each year, Warren and Charlie hold an annual shareholder meeting in Omaha to provide updates and allow people to ask them questions. These meetings are attended by over 40,000 people. The people attending include people who are new to investing but also representatives from some of the largest and well-known investment companies from around the world as they all seek financial wisdom from Warren and his partner.
Warren is also a philanthropist and has pledged to give away 99% of his money to charity.
Could your kids follow in his footsteps?
In short, yes. It is possible for your kids to be the next Warren Buffett. You might think that is a crazy thing to say but a lot of Warren’s success is driven by actions taken when he was a young boy.
There are 4 actions that make Warren as wealthy as he is and I reckon your kids can do at least 3 of them. By doing at least these 3, your kids will be more like Warren than 95% of other people.
ONE: Started investing early
Warren made his first investment when he was 11 years old. A significant part of Warren’s success is a result of his investing for 80 years. In fact, 90% of his wealth came after he was 65 years old!
This is due to compound interest. The best way to explain this amazing concept is to think of money as a seed. If you start planting a seed (invest your money), over time it will grow to become a tree which will produce more seeds (let's say it produces two seeds for simplicity). If you plant those two new seeds, they will grow into trees (so you started with one seed and now you have 3 trees). Those three trees produce more seeds which you plant and the forest keeps multiplying in size. The more time you wait, the bigger and bigger the forest grows.
This is really important as it isn't that Warren has been the greatest investor to live. It has more to do with the fact that he has just been doing it for such a long time. Sadly, you and I could never be Warren as we are too old. However, if you help your kids to start investing now, then they'll certainly be on the right starting track to become the next Warren Buffett. If you don't know where to start in terms of setting up an investment account for your kids then please check out my free investment guide here
TWO: Started businesses when he was young
In order to invest, Warren started finding ways to make money from a young age. At 13 years old, he delivered newspapers (getting up at 4:30am each day). He would supplement his delivery income by also selling magazine subscriptions to those he delivered to.
When he was 15, Warren and a friend bought an old pinball machine and put it in a local barbershop. From the money they made from the original pinball machine, they bought more pinball machines and put them in barbershops around the town.
These mini-business adventures allowed Warren to start to understand how the world of money worked. He learned how to manage money, sell his ideas and work with others.
It is fully possible for your kids to follow in Warren's footsteps and look to find ways to make money from a young age. You can learn more about how to help your kids start their own mini-business here
THREE: Didn’t care about what others were spending their money on
As you just read, when Warren started making money from his pinball machines, he used the money to buy more pinball machines so he could make even more money. He didn't really care about using the money to show off how much money he had to others. This mindset has stayed with him throughout his entire life and has been one of the reasons he has been so financially successful.
Warren lives in the same house that he bought in 1958. He doesn’t care about fancy clothes or cars. He likes his house and friends and importantly loves the work he does (hence he is still doing it at the age of 92).
His focus on doing what makes him happy means that he has not spent his money trying to impress other people. As a result, he has kept a lot of his money. It would have been very easy for him to buy lots of fancy things when he was young but that would have dramatically changed his fortune as he got older. One of the lessons I strongly recommend parents focus on when teaching kids about money is to avoid 'Keeping up with the Jones'. To help with this you can read them 'The Invisible Slime Story' or play a game with them using M&Ms.
Here's how the M&M game works:
This fun and simple game helps them to appreciate that overspending (or eating M&Ms) early on has a big impact on how much they will have later. Essentially, if kids can learn to save when they are young, they are going to be on the same track as Warren! (although, remember the key is to save before spending but they should still enjoy spending some of their money. It's not healthy for kids to save all their money).
The above covers 3 of the 4 actions that have allowed Warren to become as wealthy as he has become. I believe your kids, with your help, can follow these actions.
Now, let's look at the 4th action that Warren took and consider if this is something you could, or even should, follow.
FOUR: Find the best companies to invest in
Warren Buffett researched lots of companies from a young age and using this research made big bets on which companies would do well. He would put a lot of money in just a few companies. This has worked out very well for Warren. Over this investing lifetime, he has managed to grow his investments by around 20% per year on average. This is a lot more than most people who invest in the stock market.
Do I believe that your kids can pick the best companies like Warren? I doubt it! There are hundreds of professional investors who try and pick which companies are going to do well in the future but most of them get it wrong. Warren and Charlie have a unique skill in picking great companies so it's hard to believe it can be easily replicated by others.
In fact, even Warren and Berkshire Hathaway haven't been able to find great companies recently. The returns over the last 10 or so years have been similar to those that just bought all the different companies in the stock market. This is why Warren recommends that most people invest in the entire stock market if they want to invest (which is what my family does and what your family can do too! Find out more here)
For my daughters, I would ignore this last action. Even if they end up with only a fraction of Warren's wealth, they will be on track to becoming financially healthy. Especially as they won't be sitting around worrying if their financial future will change based on whether or not a handful of companies will do well over time.
It's also worth noting that there have been some investors who have been much better than Warren at picking great companies. However, as they haven't been following the first three actions, they are nowhere near as financially successful as he is.
Wanting to be Warren Buffett
I appreciate the irony of saying that to be like Warren, don’t compare yourself to others. When I was talking to my daughters about Warren Buffett, I was clear that we shouldn't want to be like other people but should look to learn from others.
I was clear that whilst I admire what Warren has achieved financially, I wouldn't want to switch places with him right now. I value being young (relative to Warren) more than I value his fame and fortune. Also, I don't know much about his personal life (although he is married to someone called Astrid, the same as me!) so I wouldn't want to change places. I felt this was an important lesson as whilst we might admire what people show us, there could be lots of other things which are less attractive and aren't being shown and therefore we should never focus too much on wanting to be like other people.
Last point about Warren Buffett
Warren is extremely wealthy but is very clear about the impact this could have on his family in terms of their own money mindsets. He has previously said:
"I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing".
I love this. There are many stories of people becoming wealthy but not teaching their kids about how to look after money and their money disappearing before long. One of the famous examples is the Riches To Rags story of the Vanderbilts which you can read here.
Your kids could be on the same financial path as one of the world's wealthiest people, Warren Buffett. With your help, they can start taking 3 of the 4 actions that set Warren apart from others when he was growing up.
Started investing early
Started businesses when he was young
Didn’t care about what others were spending their money on
For the 4th point, picking great companies, I don’t want to discourage your kids from learning about how companies work or investing in the entire stock market. I would discourage you from helping your kids to pick individual stocks. Picking individual stocks is crazy hard and most professional investors can't do it (despite the high fees they charge).
If you want to help your kids start investing, read this blog (How to teach your kids about the stock market) and read our investing guide here Don’t forget to share this blog to help other families to start talking about money.
Thanks for reading! Will
P.S. Your kids can learn all about investing by reading Grandpa’s Fortune Fables. A great gift this Christmas.