(A post from Alison)
Katherine Graham was the owner of the Washington Post, which her husband ran. When her husband committed suicide she took over and, with little business experience, maintained and built the brand. Warren Buffet joined in early 1973 as a shareholder and business advisor. I read recently that the advice he gave them for their pension fund investments meant they have now have draw-down responsibilities of around $2.5 billion and assets of around $3.5billion. Not a bad position to be in!
Katherine Graham had been bought up with great wealth and what fascinated her about Warren Buffet was his plain meat diet, (no Lobster for him) and that he still lived in the same house and drove his original Volkswagen.
His argument? I can’t afford a $20 million car!
Warren was so sure of his investment plan he could see that the extra money spent on a car would be unavailable for investment and therefore, in lost capital value, a new car was worth millions. Not worried about keeping up with the Jones’, he stuck to his lifestyle.
I was recently at a social event where a new pair of blue Manolo Blahniks worth $1200 was being much admired. I knew the cost of these shoes was more than the weekly take home salary of the wearer, at the very least. It reminded me of my first job, where I coveted and purchased on layby (remember the days before credit cards?) a pair of pink and white Nubuck suede shoes worth twice my weekly take home pay.
I did some calculations. If I had not bought those suede shoes, at a compounding rate of 10% I would now have $2,200 in the bank. With a Buffet-type return averaging 20%, then I would have closer to $200,000. If I had also put aside the equivalent amount per year, every year since I bought the shoes, my savings would now be $26,000 at 10% and at 20%, $1,340,000! That is the equivalent of a very nice house!
Those money for those blue Blahnik shoes, invested instead, would give $44,000 at 10% or $1,520,000 at 20% by retirement age. If the equivalent was also saved every year it could be worth $470,000 at retirement age at 10%, or potentially $9,208,400 at 20%.
So can any of us justify a $9 million dollar pair of shoes?
We all can't be Warren Buffet, yet if we really think about our spending patterns and investing decisions are we maximising our money? I challenge you to do a similar calculation on some of your purchases in the last 12 months.