FP Article 20

Warren Buffett's Wisdom On Country-Individual Parallels

by Rajen Devadason

Warren Buffett

You may want to carry out your own research on this incredibly smart investor, who is deemed by many people to be the single most successful investor of all time. What makes Buffett's observations particularly useful is his extremely open writing style. For clear examples of that you may want to initiate searches on his name, Warren Edward Buffett, his beloved holding company, Berkshire Hathaway, and his primary mentor, the late Father of Security Analysis Benjamin Graham. But right now, I suggest you pay close attention to a core point Buffett made about the strong parallels that exist between a country that mismanages its wealth and a person who does the same thing, albeit on a much smaller scale. 
 

Buffett has long made it clear that in his opinion there is a powerful causal link between America's worsening trade deficit and a weakening greenback.

That's not to say that the US dollar is going to tank and simply head south in a straight line any time soon. It is the most important currency of the global marketplace. You already know, I'm sure, that the greenback is the de facto currency of global online trade. (For an obviously self-serving example that's close to my heart and wallet, check out my digital information product listing here, which is priced solely in US dollars. This means that as long as you aren't American, chances are great that the cost of such products has fallen in your own base currency!)

Anyway, returning to the subject at hand, I believe it is likely that the greenback will see short-lived periods of strength in the years ahead interspersed by more compelling episodes of weakness.

If I read Buffett correctly, his perception is that a balanced trade position is healthy and can be categorised as real trade. In that earlier mentioned letter, he writes, "We had about $1.44 trillion of this honest-to-God trade in 2006." His contention, however, is that the imbalanced portion, which in the US's case for 2006 was about $760 billion of imports into America that were not matched by any exports of either services or goods. That sum of $0.76 trillion represents about 6% of the US's GDP!

Buffett has a magical way of taking often densely opaque financial subject matter and making the salient details clear. Here's how he puts it, "Making these purchases that weren't reciprocated by sales, the US necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced." That 'peeling rate' is currently more than US$2 billion a day!

Put in such bleak terms, Buffett's message is a clarion call for America to return to fiscal prudence.

Ironically, it was America's earlier extended history of prudence that built up the 'fat' that is now being burnt up at an alarming rate. Personally, I can't help but notice the parallel here with what we as a species - again led by the US - are doing with our precious planetary store of finite hydrocarbons.

You may want to mull over that particular facet of 21st century life even as we return to the issue of national profligacy and what lessons we can extract for our own personal finance development.

One definition I use for wisdom is a capacity to remain humble enough, and secure enough, to surround ourselves with people who are smarter than us!

In my opinion, the pronouncements of Buffett - certainly in the realms of economics, finance and investment - can often serve as great sources of profitable counsel.

For instance, Buffett points out that for every year from 1915 to 2005, America's investment income account was positive, meaning it earned more from its investments abroad than non-Americans earned from their investments in the US. That situation flipped in 2006, with the US investment account going into deficit!

So, is this the beginning of the end of America? That really depends upon the Americans and whether they continue to hurtle toward economic oblivion or if they make a dramatic about-turn and return to the fiscally prudent ways of their ancestors.

Now, what about you... in your personal capacity? Are you doing the right things needed to succeed financially?

As you mull over your own circumstances and goals, I hope you will particularly focus upon your personal earning-spending capacity - as an individual. You don't want to emulate - at a personal human level - what America's been doing on a superpower scale. This is Buffett's observation concerning his own country:

"In effect, we've used up our bank account and turned to our credit card. And, like everyone who gets in hock, the US will now experience 'reverse compounding' as we pay ever-increasing amounts of interest on interest."

If you would like to immediately purchase a copy of my financial novel Liberty - From Debt-Slave to Money Master, you should still first read what others have said about it - here. Liberty teaches 2 powerful strategies for getting out of personal debt through the enjoyable (and interestingly linked) fictional stories of 3 young men who have made very different types of serious financial mistakes.)

Finally, if you're a Malaysian who is between 35 and 50, is very, very, very serious about life planning and financial planning, and if you want to learn more about my consulting services, you may do so here.

© Rajen Devadason