Warren Buffett's Advice On Skinny Dipping



Aug 8, 2020
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The Skinny Dipping chapter in Dave Ramsey's book titled, The Total Money Makeover is excellent. It's right up my alley. I love financial talk when it's hard hitting. For some reason, I love it most when it tells people to stop acting like children and begin being responsible. So much of our country is totally out of control when it comes to money. For example, I was just reading through a few posts on a pet forum. One person contacted another person about buying a puppy. The buyer asked the seller if they could lower the price of the dog. If not, perhaps the buyer could pay $50 up front and then owe the rest of the money. It'll be paid at a later date. Do you see anything wrong with this picture? I see a few things. I don't think I need to explain what they are.

Warren Buffett says, "When the tide goes out, you can tell who was skinny-dipping." This can mean a few things, but I'll tell you what I think it means. It means that people can do a lot of things with their money, but only some of those people are doing things that are durable and long lasting. If the entire stock market is rising and some investors are making risky purchases, when the market falls again, those people are going to lose a lot of money. The prudent investors will perhaps lose money, but not nearly as much as the risky betters will. I remember many years ago when I first began investing. I bought some mutual funds from a company in Rye, New York. They were totally stupid investment. I paid way too much in broker fees, but I had no idea what I was doing. Anyway, when I spoke to another company a year later about making some different purchases, the sales guy from the company made a few suggestions. I said something to the effect of, "Well, actually I'd rather choose what I buy. I've made some good money over the past year with my recent picks." Do you want to know what the guy I was talking to said to me as a reply? He said, "I'm sure you did. Everyone did well last year." A rising tide lift all boats, or something like that. Basically, my investments were rising with almost all other investments. I had no idea if they were sound investments or not. If they were, then good, I'd be fine. But if they weren't, I'd be in for a world of hurt during a downturn.

Dave's big on having a solid foundation from which to manage money. He says that it's like a marriage. If you build a relationship on hopes and dreams as opposed to sound judgement and good sense, it's bound to fail. How many times have you seen newlyweds profess their love for one another? Almost all of them do. It's strange that just about half of them get divorced. If all of these newlyweds were so in love, what happened? I'll tell you what happened. The ones who got divorced didn't use their heads when they should have. People rush into things. They do what makes them feel good at the time. They become emotional. The problem with all of these things is that while they're rewarding and fun, they're only so for the short term. When reality kicks in and you watch as your husband leaves his smelly laundry piled up in the corner of the bedroom or your wife scream at the neighbors from across the front lawn, you wonder why you didn't use a bit more prudence with one of the biggest decisions of your life.

Managing money is similar to managing relationships. It shouldn't be done with emotion. It shouldn't give you a high. It shouldn't make you feel as if you're going to win. Everyone has heard of a hot stock pick along the lines somewhere. Heck, two weeks ago GameStop (GME) was trading at close to $350. Today, it's $50. A few weeks before its peak, it was trading at $20. I am embarrassed to mention how many friends called me asking what they should do. Each one of them had a handful of money to throw around. The problem was, each person who called me, did so when the stock's price was $350. They all wanted to "get in" at the peak. Classic human behavior. Of course I gave each one of them a virtual slap across the face because of their stupidity. My negativity makes me feel bad at times, but my friends worked for their money. I didn't want to see them waste it like that. Hunting around for the big win is no way to manage finances.

Dave says that if you've got a bad map, you're going to miss the party. That is so true. I can't even tell you how many friends I have who have no idea what they're doing with their earnings. If it weren't for their retirement accounts, they've have no savings at all. People out in this world talk about freedom a lot. I hate to say it, but given the freedom to manage one's own retirement, we'd see a lot of very broke retirees out there. It takes a strong person with the right amount of fortitude to manage their own investments successfully. Doing so is actually easier than you would think. If someone were to simply put their savings into Vanguard's S&P ETF (VOO), they'd earn a 12% return, on average, year over year, over the span of their life. It's really not difficult to make money in this world. The problem is, managing the money someone makes so there's actually money to manage. To put it simply, people have a real tough time with saving their money.

Overspending that doesn't feel like overspending because things are going well is still overspending. What a great line. Here are two examples of what this means: let's say someone got a raise at their job, so they decide to take their entire family out to dinner at an expensive restaurant. While there, they buy the entire bar full of people a round of drinks. Question: was this foolish behavior? What it overspending? Yes and yes. Just because the individual in question could count on making more money in the future, that doesn't mean they should haphazardly throw their current money away. Here's another example. It has to do with the GameStop stock situation. Earlier in the year, a rational market had valued the stock at $20 per share. This is what the company was deemed to be worth. Because of some shenanigans on the internet, the stock price was driven up to $350 per share over the span of a few days. There was no basis for this stock price increase, yet thousands of investors flocked to the stock to make purchases. Obviously, since the stock is only priced at $50 per share today, a lot of people lost a lot of money. The question is, why in the world did they buy any in the first place? How did they justify their purchases? Did they think the stock price was actually based on earnings and assets or were their purchases based completely on emotion? This is what Warren Buffett was referring to with his skinny dipping statement. The tide had gone out on GameStop and those investors who made foolish investments were caught skinny dipping.

The world is full of good investment advice. The problem is, it's also full of bad advice. And to compound that problem, human nature makes it very difficult to make sound decisions when it comes to money. For some of us, the word "no" doesn't exist. People want it all these days. They feel that if they can't have it all, they must be doing something wrong. They feel as though they need to work harder or somehow scheme certain things into existence. While it's good to work hard and to show ambition, those things can be detrimental under the wrong circumstances. In some ways, our society is lacking restraint, temperance, self-control - you name it. It's lacking and it's lacking bad.

Ask yourself this question: if you were laid off today, would you be okay with that? How long would your money and your lifestyle last? If you wanted to, could you retire today? If not, why not? If you suddenly had no income, how would your life change?

I've got a friend who has done an extraordinary job with managing his finances through the years. I strive to merely act as if I emulate him. My friend isn't wealthy by any means, but he is secure. He's made it one of his life missions to be the way he is. Part of the reason he's so careful and prudent is that he doesn't like being owned by anyone or anything. He doesn't want his job to control him. He doesn't want the fact that next month's bills are coming in to control him. He enjoys making his own choices. He doesn't like doing certain things and he's made sure that he'll never have to do them. My friend is someone I look up to. Through the years, he's built up assets that pay him a steady income. His assets are secure and built upon true value. They're not pie in the sky ideas or half baked fads. He does well no matter if times are good or bad. The markets don't bother him. They can go either way, he still gets paid. I think he learned how to live from his parents. They were of the depression generation. They've seen things not even they enjoy recalling. I've spoken to these people and trust me when I say, they know where to put their money. They've been their though the lies our world has fed them. They don't get swept up with enthusiasm. They understand how wealth can evaporate overnight when invested even under ideal conditions. These people are savvy.

In later posts, I'll be delving into different methods for using intelligence, patience, and skill when it comes to investing and managing money. Anyone can do what I'll be writing about. All it takes is some discipline and common sense. And restraint. Don't forget around restraint.

Do you have any stories about financial mismanagement you'd like to share? If so, please do down below. The more we learn about what not to do, the more we learn what to do, so don't be shy about talking about your experiences or the experiences of those you know. Also, if you've got any stories of successes, please share them below too. I'd love to read them.

This post is part of a series: The Total Money Makeover by Dave Ramsey
Warren Buffett's Advice On Skinny Dipping was posted on 06-04-2021 by Phoenix1 in the Finance Forum forum.

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