Warren Buffett is widely considered one of the most successful investors of our time.
From 1964 to 2021, his company Berkshire Hathaway delivered compounded annual gains of 20.1% — substantially outperforming the S&P 500’s compounded annual return of 10.5% during the same period.
Buffett’s legendary investment career has also made him one of the richest people on earth, with a net worth of over $110 billion, according to Forbes.
Yet despite his massive wealth, Buffett doesn’t live a lavish lifestyle.
In fact, he still lives in the same house in Omaha that he bought back in 1958 for $31,500. As for his eating habits, he’s not splashing out on champagne and caviar every day — he prefers to patronize McDonald’s and Dairy Queen instead.
In an era where we’re constantly exposed to images and videos of influencers’ opulent lifestyles, it’s important to remember that when it comes to building wealth, the boring approaches are often the best.
Here’s a look at three valuable lessons from Buffett’s famously frugal approach to money.
Learn the habit of saving
It’s not easy to save money in today’s economic climate. White-hot inflation continues to deplete savings. And companies are announcing major layoffs.
According to data from the Federal Reserve Bank of St. Louis, the personal savings of Americans plummeted to $507.65 billion in Q3 of 2022 — a substantial drop from the $4.85 trillion from the same period just two years before.
Savings are now below even pre-pandemic levels and living paycheck to paycheck has become the norm for many.
That’s not what Buffett wants to see. During an episode of the Dan Patrick Show, Buffett was asked what he thought was the biggest mistake people make when it comes to money.
“Not learning the habits of saving properly early,” the legendary investor replied. “Because saving is a habit. And then, trying to get rich quick. It’s pretty easy to get well-to-do slowly. But it’s not easy to get rich quick.”
In other words, instead of trying to become a millionaire overnight, it’s probably wiser to get into the habit of saving and building a nest egg slowly but steadily.
Forget that Lambo
If money is no object, what car would you drive? Mercedes, Bentley, or perhaps the prancing horse from Maranello?
Those might be what we think of as “rich people cars,” but you won’t find them in Buffett’s garage.
In fact, he’s known for being especially frugal with cars.
“You’ve got to understand, he keeps cars until I tell him, ‘This is getting embarrassing — time for a new car,’” his daughter said in a documentary.
After all, we’re talking about the man who once had a vanity license plate that read “THRIFTY.”
READ MORE: 4 simple ways to protect your money against white-hot inflation (without being a stock market genius)
There are many reasons why you might want to think twice before purchasing a luxury vehicle.
The first is depreciation. Cars start losing their value the moment you drive off the lot. According to U.S. News, the average depreciation for all vehicles over the first five years is 49.1%, while luxury brands can lose a lot more than that. The average five-year depreciation for a Mercedes S-Class is 67.1%. For a BMW 7 Series, it’s a whopping 72.6%.
Moreover, luxury cars can cost more to maintain and insure than economy cars. So you have to fork up not just the purchasing price. And once luxury cars run out of warranty, they can also be more expensive to repair.
Don’t forget, there’s opportunity cost as well. The money you spend on an expensive vehicle could have been put into your investment portfolio and earn a return year after year. That potential return — which can get compounded as time goes by — is your opportunity cost. And it can add up.
Buy quality and value
Buffett’s frugality is particularly evident in his investing style.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down,” he wrote in his 2008 Berkshire Hathaway shareholder letter.
In particular, Buffett is a proponent of value investing, which is a strategy that involves buying stocks that are trading below their intrinsic value.
It’s clear where he got that idea: Buffett was a student of Benjamin Graham, widely known as the “father of value investing.”
“Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get,’” Buffett wrote in 2008.
By purchasing stocks of companies that are trading at a discount to their intrinsic value, investors can achieve a margin of safety.
But that doesn’t mean Buffett will pick up just any stock on the floor. The Oracle of Omaha also looks for companies that have a durable competitive advantage.
A look at Buffett’s portfolio can give you an idea of what those companies might be. Berkshire’s largest publicly traded holdings are Apple, Bank of America, Chevron, Coca-Cola and American Express — companies with deeply entrenched positions in their respective industries.
So what if you have to choose between quality and price? It’s probably better to focus on quality, as long as the price is “fair.”
In Buffett’s own words, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.