Why Warren Buffett?

He takes partial if not whole ownership interests in consumer monopoly companies with strong and steady earnings, healthy returns and the ability to reinvest earnings for continued compounding.  The   bottom line is, if you invest like Buffett, you can count on capital gains with cash flow regularity, similar to a quality “rental property” with consistent returns.  Dividends will serve as icing on the cake.

The recommendation then, in order to make the transition from the cash flow world to an “acceptable” world of mutual funds is to:

·         Invest in mutual funds that invest like Buffett, buying into major Berkshire holdings such as Costco, Coke and Wal-Mart.

·         Invest in funds that invest in Berkshire Hathaway.

·         Invest in Index Funds as Warren Buffett recommends if you choose to not play the single stock game. 

Warren Buffett Versus the Cash Flow Investor – Round One

If Warren Buffett were here he would say, “I want to invest in a consumer monopoly company that exhibits a strong track record of earnings with the ability to retain those earnings at a high rate of return.”  He would go on to state, “Why would I withdraw the return from my investment as cash flow and suffer the consequences of having the tax-man over for supper?  I will leave the gains within the vehicle thank-you very much.”

And our cash flow investor will say, “But I need cash flow to be financially independent.  I must cover $3,000 in monthly expenses otherwise I will be stuck working at this rubber chicken factory the rest of my life.”

But, the cash flow investor will also agree with Warren Buffett on many key points: “Buffettology” involves investing from a business perspective which includes evaluating an investment’s profit and loss statement for consistent earnings and rate of return.  A cash flow, rental property investor will construct a pro forma income statement using rents as income and vacancy losses, property management fees, repairs, maintenance, insurance, taxes and principal and interest payments as expenses and evaluate for “cash flow” and rate of return based on the initial investment.  Both agree that earnings and not speculative growth lead to appreciation, and that a lower price will increase the return. Thus, an important bridge forms a connection between the cash flow investor and the stock universe, the business perspective investment methodology of Warren Buffett, and it is not too much of a logical leap to approach mutual funds as a cash flow vehicle from this beachhead. 

Financial Plan

1.            Sock away an emergency fund – usually three to six months of expenses.

2.            Pay off all bad debts smallest to largest which will allow you to “snowball” the debt.

3.            Begin investing in the ol’ 401k, at least up to the employer match.

4.            Pay off the house early.

5.            Learn about advanced investing vehicles, reach financial independence.

Ideally, in the world of Warren Buffett, you get this whole money business out of the way so you can go on to do what you are truly supposed to do.  For Buffett, his game is discovering and investing in spectacular companies with durable competitive advantages that will continue to grow in earnings and value over time.  Thus, in the Warren Buffett paradigm, it is imperative to achieve financial independence.   

Here is a rundown of the typical cash flowing assets and the types of income delivered:

Of Assets and Income

·         Rental Property       =           Rental Checks

·         Dividend Paying Stocks       =             Dividend Distributions

·         Covered Call Options       =           Call Premium

·         Systemic Business Models        =          Earnings Distributions

·         Intellectual Property         =           Royalties, Licensing Fees

The question is; where do mutual funds fit into this bucket of cash flowing assets if at all?  The first place to look is found in the common ground that lies between Warren Buffett’s “business perspective” investing methodology and the model of a cash flow rental property investor. 

Transcending Via the Beachhead of Warren Buffett

“The stock investor is neither right nor wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.” – Benjamin Graham

“The long run is a misleading guide to current affairs.  In the long run we are all dead.”  - John Maynard Keynes[i]

One can interpret Keynes’ uplifting statement to mean “why be concerned with the capital gains of tomorrow if the cash flows of today do not pay the bills?”  An investor who seeks financial independence today will agree that cash flows today take priority over the nest egg of tomorrow and thus they may find solace in the statement that “in the long-run we are all dead.”

Now that everyone is feeling warm and cheery, let us talk about cash flow, financial independence and mutual funds.   

Financial Independence Defined

By one definition, financial independence is the state of having enough income from asset sources to meet or exceed monthly expenses.  In his article for Investopedia, Stephen D. Simpson defines it as “having enough wealth to live as [you] wish for the rest of [your] life without having to work.[ii]”  In specific terms, this means that an individual who has $3,000 in monthly expenses will be financially independent once they have $3,000 in monthly income from assets.   This income can come from various asset sources including rental property, dividend paying stocks, intellectual property and yes, in our paradigm to be presented, mutual funds. 


[i] A Tract on Monetary Reform, 1924, p. 80.

[ii] Read more: http://www.investopedia.com/financial-edge/0611/Declare-Your-Own-Financial-Independence-Day.aspx#ixzz1sRpJytBZ