Recapping the 2015 Berkshire Hathaway Letter to Shareholders

BUFFETT

It’s our favorite time of year! Well, it’s close for financial fans and money nerds. Here’s what’s going down: Brian and Bo cover the 2015 Berkshire Hathaway Letter to Shareholders in this episode of The Money-Guy Show.

They’re excited to share these takeaways with fellow fans as there’s much that can be applied from this annual letter to our personal lives and portfolios.

In the 2015 edition of the Berkshire Hathaway annual letters, both Warren and Charlie shed light on the past 50 years of their partnership and what they hope the next 50 years will hold. Here are the highlights from each.

Highlights from Warren’s Annual Letter

Brian took tons of notes on Warren’s letter and shares the key takeaways with us:

Knowing the value of investments is priceless.

The $25 million purchase of See’s Candy, which had a $4 million cash flow with only $8 in net tangible assets. It was a great move that allowed the company to generate cash flow, which could then be used elsewhere. Brian likens this to putting your dollars to work for you in your portfolio.

Avoiding the “new paradigm.” This goes back to when the dot com boom occurred, and anything with “dot com” in the business plan was given huge valuations. As investors, we should be wary of this. P/E ratios of 200 are not normal, regardless of what pundits are saying.

A nugget of wisdom learned from Charlie: forget what you know about buying fair businesses for wonderful prices. Instead, buy wonderful businesses for fair prices.

We need to ignore market noise and focus on the basics. Warren also states you should only purchase Berkshire shares if you plan to keep them for at least 5 years. Brian says investors need to have a realistic time horizon when investing in stocks and bonds.

Warren is extremely against leveraged investments. Bo brings up that people are asking if they should mortgage their primary residence in order to invest the proceeds as rates are so low — and the answer is no!

Cash is to a business what oxygen is to a person – and people will panic in response to economic situations, we just don’t know when. Brian reminds us that having cash reserves in the form of an emergency fund is absolutely necessary.

Be aware of investments that require “sudden demands for large sums.” Brian gives the example that so many of their clients are set up for wealth and success, but they often get distracted by riskier investments that seem better. It’s key to stick to the path, because at some point, the music will stop.

Fight against companies that display “arrogancy, bureaucracy, and complacency.” As investors, we need to do the same for ourselves. Brian points out that so many people have a great income, but they’re not turning it into wealth.

Highlights from Charlie’s Berkshire Hathaway Letter

Charlie explains what the core competencies of Berkshire Hathaway are:

  • All employees should be invested in the company.
  • They want win-win results for everyone – employees and investors alike. Everyone should benefit.
  • Berkshire stays away from short-term executives. Those executives that make decisions should be there to face the results at the end.
  • They seek to minimize bad effects that come from large bureaucracies at headquarters.
  • They want to personally spread the wisdom they’ve attained throughout the years. Education is important.

What’s the Take-Home Lesson for You?

Whether you’re advanced in your knowledge of personal finance, stock markets, and smart investing, or just starting out and eager to learn the basics, there are important lessons to be learned from each of these letters. What can you apply to your own business or financial situations?

Retirement Savings Plans for Entrepreneurs

Retirement Savings for Entrepreneurs

Running your own business as an entrepreneur provides you with worlds of opportunity to create a meaningful life and grow real wealth.

But self-employment comes with a lot of responsibility, too. You’re the boss, you have to keep track of your expenses and income, you have a greater tax burden, and you have to figure out how to fund your retirement.

According to a survey from TD Ameritrade, 70% of entrepreneurs aren’t contributing to a retirement plan. 40% of self-employed individuals aren’t saving regularly, and 28% aren’t saving at all.

Those are some frightening statistics, but you don’t have to be a part of them.

If you’re behind on saving for retirement, consider these 5 different retirement account options for the self-employed, so you can start saving as soon as possible.

Traditional and Roth IRAs

We’ll start off with Traditional and Roth IRAs. Anyone can open one of these accounts — self-employed or otherwise — and they’re a great starting point when looking to fund your retirement.

The contribution limit for each of these accounts as of the 2015 tax year is $5,500 for those under 50 and $6,500 for those over 50.

What’s the difference between the Traditional and Roth IRA? With a Traditional IRA, your taxes are deferred so you’ll get a tax break while you’re contributing. Your withdrawals will be taxed later on.

With a Roth IRA, the opposite happens. You pay taxes on your contributions on an ongoing basis, but you can withdraw your money tax-free in retirement.

Which should you choose? It depends on your personal situation. The general rule of thumb tends to recommend Roth IRAs for younger individuals who think they’ll be in a higher tax bracket when retiring.

Solo 401(k)

A Solo 401(k) is simply a traditional 401(k) for business owners with no employees (but your spouse can contribute if they earn an income from your business). It follows the same requirements as a traditional 401(k) as well.

As a result, you can contribute as both an employer and employee. As an employee, your annual contribution limit is $18,000 in 2015 ($24,000 if you’re over 50), and as an employer, you can also contribute up to 25% of your compensation.

The maximum total contribution limit (excluding catch-up contributions) for 2015 is $53,000.

Depending on your plan, the Solo 401(k) can be offered as a traditional or Roth, and it functions the same as the IRAs (with traditional growing tax-deferred and Roth growing tax-free).

SEP IRAs

The Simplified Employee Pension Plan (SEP) is similar to a Traditional IRA . You can claim a tax break in the year you make contributions, which means you can potentially save more as self-employed individuals tend to pay taxes at a higher rate than regular employees.

The SEP IRA also offers a sizeable contribution limit: you can contribute the lesser of 25% of your earnings, or up to $53,000 for the 2015 tax year.

Another bonus is you can contribute to a SEP IRA even if you’re self employed only part time, and you can still contribute to a 401(k) offered by your employer.

However, there isn’t a “catch-up” contribution policy in place for those over 50.

Simple IRA

You can take two routes with a SIMPLE (Savings Incentive Match Plan for Employees) IRA: you can open one if you’re the only employee of your business, or you can open one if you have fewer than 100 employees.

If you choose the latter, you either have to make a mandatory 2% retirement account contribution for every employee, or you can make an optional matching contribution of 3%.

Annual contributions are limited to $12,500 for the 2015 tax year, with catch-up contributions of $3,000 available to those over 50.

If you’re the only employee, a Simple IRA is a good choice if your income isn’t substantial – otherwise, a SEP IRA is the better option.

Other Plans

There are two other defined contribution plans available to self-employed individuals, and you can also contribute to a defined benefit plan:

  • Profit-Sharing Plan: This plan lets you decide how much you want to contribute on an annual basis. The limit is up to 25% of compensation (not including contributions for yourself), or $53,000 in 2015.
  • Money Purchase Plan: This plan requires a fixed percentage of your income to be contributed every year, also with a limit of up to 25% of compensation (not including contributions for yourself). The fixed percentage is determined by a formula stated in the plan.
  • Defined Benefit Plans: This is a traditional pension plan, which means the focus is on the payout you’ll get come retirement, not on annual contributions. You decide how much you want to be paid (the maximum annual benefit you can receive in retirement is up to $215,000 as of 2015), and an actuary must calculate the minimum funding levels you’ll need to reach each year to make that possible.

Start Focusing on Retirement

Self-employed individuals have it harder when it comes to money management, but that shouldn’t be an excuse to get behind with saving. Your future is important, and if you can’t save for something like an emergency fund, what do you expect to live off of in retirement? Prioritize saving in your budget and make retirement a possibility.

The amount of options can get overwhelming for entrepreneurs, so don’t be afraid to reach out to a professional to help you. You let a CPA handle your business taxes because they’re the experts and taxes are complicated. In the same way, a financial advisor can handle the planning side of the equation to ensure you’re creating a strong financial future for yourself.

Remembering a Personal Finance Icon and His Timeless Advice

Thomas J Stanley

This episode of The Money-Guy Show is a reflective one as Brian and Bo pay tribute to Thomas J. Stanley, co-author of the popular personal finance book, The Millionaire Next Door. They also discuss the importance of healthcare directives in light of Brian’s father-in-law passing away unexpectedly.

As loss is unfortunately inevitable in our lives, Brian is also offering his wisdom on how we can turn loss into motivational fuel.

The Timeless Advice of The Millionaire Next Door

Dr. Stanley passed away a few weeks ago in a tragic car accident and Bo and Brian pay tribute to him.

The Millionaire Next Door has influenced the lives and financial decisions of so many people. Brian recalls first reading the book back in college and having his financial DNA changed. He says it was amazing to read that 80% of millionaires were first-generation rich, dispelling the myth that the wealthy commonly inherit their money.

This means that anyone could become a millionaire, and the factors of the wealthy listed in the book are attainable by anyone as well.

The Money Guys also discuss Dr. Stanley’s other book, Stop Acting Rich: …And Start Living Like a Millionaire. It contains a great formula to figure out if you’re accumulating wealth fast enough:

Income * Age * 10% = ?

You can compare the number you get from this equation to your net worth to gauge your progress. (Brian notes that the formula works better for those over 35 years old.)

How to Deal With Loss in a Positive Way

Brian received a question earlier on how he turned a negative event into a positive: when his father passed away, he decided to start his own business.

He mentions that the darkness of the situation gave way to clarity as he reflected on what truly mattered in life, and gives 4 tips on how to turn loss into motivational fuel after gaining clarity:

  • Visualize what you desire and dream
  • Craft a big picture plan
  • Take baby steps to implement the plan
  • Don’t look down or back

The Importance of a Living Will

Brian highlights the importance of having a living will in place so your loved ones can have peace of mind in the event you become incapacitated.

Brian’s father-in-law recently went in for a routine outpatient elective surgery, and unfortunately experienced complications that led to his passing. However, because he had a living will, the family was able to honor his wishes and come to peace with the fact he had lived a long and fulfilling life at age 81.

Brian and Bo urge listeners to set up a living will for themselves, and to have an open discussion about it with their parents. If the conversation seems difficult to have, you can always use The Money-Guy Show as a catalyst to talk about it.

To help you think about what factors you need to consider, Brian recommends looking at the Mayo Clinic’s guide on the subject.

None of us like to think about death, but there are positives we can take away from these situations. Make sure you reflect on what matters most to you, and take the time to craft a living will so your loved ones don’t have to make critical decisions about your health without your input.

The Serious Impact of Investment Fees

InvestmentFees

Investing is a major part of building wealth and creating a nest egg that can work for you in the long-term. Unlike savings accounts, investing can result in remarkable returns on investment and can help beat the cost of inflation.

Investing is a key component to building wealth and paving your financial future. But there’s a not-so-hidden aspect that can slowly eat away at a nest egg if you’re not careful to guard against it: outrageously high investment fees.

The Serious Cost of Investment Fees

Investment fees may seem innocuous at first. But  they become more detrimental over time. Ignoring costs is a huge mistake.

Some of the worst fees appear in employer-sponsored 401(k) plans, and most people don’t even know how much the plan is costing them each year. Many employers are in the same boat, and simply don’t know the costs associated with the plans they’ve chosen for their employees.

Investors trying to go it alone may also end up paying more than if they had hired a trusted advisor working in their best interest, if they don’t understand how to evaluate funds or if they don’t know to pay attention to things like turnover in management, mutual fund fee structures, and other factors that can increase their expenses.

It doesn’t have to be this way. You need to learn how to manage those fees so you can maximize your returns.

How to Minimize the Impact of Investment Fees

Many people choose to invest their money because of the magic of compound interest, failing to realize that investment fees compound too. How can you avoid the pitfalls of investment fees as an investor and hold on to as much money as possible?

Be financially smart and choose low-cost options and do your due diligence when choosing a professional to help you manage your investments.

You’ll want to choose wisely when it comes to who manages your money too. Some financial advisors may take a large commission, which will eat away at your earnings. Choose a financial advisor who works as a fee-only planner and upholds a fiduciary standard.

Also, don’t forget to speak up! If you have an advisor or an employer that manages your 401(k), ask them about what investment fees you will be paying. Ask about any expense ratios, internal fees, commission fees, annual fees, trading fees and administrative costs that might cut into your investments.

You have a right to know and are entitled to that information, but you have to do your due diligence and ask. If your advisor isn’t transparent about fees and how they’re compensated, it’s time to find a new one.

And before investing in anything, think about rates, commission fees, managements fees, trading fees, and so on. Consider the long-term implications of how it will affect your portfolio.

If you’re in a position to make decisions around your company’s retirement plan options, you can do the following to potentially save thousands of dollars in fees for the employees of the business:

  • Establish a prudent process for selecting investment alternatives and service providers
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.
  • Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices

As an investor, empower yourself with information and do your research on any investment fees before funneling more money into any assets or funds. After all, it’s your hard earned money that you worked for — don’t you want to keep most of it?