Wrong. Sorry you don't understand. Buffett paid cash in the 1950's when it was still a significant part of his net worth. You seem to haunt these boards and comment on things that you know nothing about. Why is that? It is stunning the amount of people here who offer opinions and don't even know basic facts about what they are talking about.


In 1956, Benjamin Graham retired and closed his partnership. At this time Buffett's personal savings were over $174,000 ($1.2 million inflation adjusted to 2009 dollars) and he started Buffett Partnership Ltd., an investment partnership in Omaha.


In 1957, Buffett had three partnerships operating the entire year. He purchased a five-bedroom stucco house in Omaha, where he still lives, for $31,500.

174,000 - 31,500 = 142,500

Now worth 44bn, a 308,772* increase.

Hope his house is worth 9.7Bn now to make it a good purchase!


Obviously joking with the amounts as I know how his partnership structure etc worked but he obviously would have made far far more money by investing that money and renting a house. Now you can talk about his risk profile and whether his risk of ruin was high enough that buying the house turns +ev, but knowing the companies he bought that certainly isnt the case. The house buy was a mistake, things obviously went great after but he would have been in a better position without it.

In that case it was a mistake. I hate to break it to you but Buffett is not perfect. My knowledge of him is limited to what you'd pick up passively but just from that I know the guy has huge leaks.

I don't know very much about Buffet because he doesn't matter to me. I realize a bunch of broke dreamers lionize him but from the little I know of him I disagree with a lot of his philosophy on life.

Regardless, the topic at hand is math. There is no debate about it. Paying for your home in cash when you can earn an after-tax return greater than the servicing costs of the mortgage is a mistake.

Using Buffett as an example US News tells me that $1000 invested with Buffett in 1956 would be worth $30.6M at the end of 2007.

You tell me he bought the house in 1957 for $32,500.

Lets assume he carried a $25,000 mortgage on that property.

That $25,000 invested with Buffett would have grown to $765M by the end of 2007 and the debt servicing costs would have been considerably under $100k so in essence negligible.

By not having a mortgage he is $765M poorer than he would have if he had a mortgage and that is with me being lazy and not doing the math required for refinancing options he would have had which would easily push the number over a billion gone by the end of 2007. Now that it is five years later we'd be looking at 1.2-1.3 billion gone. All of it gone because because of him paying his house in cash.

It's possible that outright owning his home made him psychologically more secure in his professional risk taking. Sort of a psychological bankroll sort of thing. "Even if I go busto, it's not so bad, I have the security of owning my house, blah blah blah". I think that Robert Heinlein said that both professional artists and professional gamblers need to own their homes free and clear to feel secure and be free to do their best work.

I could possibly agree with this if we are talking about someone who is very under-bankrolled for the amount of risk being taken. If you don't make all that much to begin with and you spend most of it then I'd agree with this. The problem is that I can't imagine people matching that criteria being able to buy a decent property either so for them it isn't really an option. For people where it is an option-- with the exception of pure degenerates-- I can't really think of many scenarios where this would apply.

It certainly doesn't apply to the most typical scenario where this issue would comes up -- dual professional household, upmarket property, above average investments, ready access to credit. People's lives don't cluster **** so fast in multiple areas that becoming homeless is a legitimate concern. If someone who is established can't make optimal decisions because of some completely unrealistic fear of ruin then that is a mental disorder.

I would disagree, I think it could apply to any professional gambler who is aggressively applying the Kelly Criterion. I know that I ran into this when I played poker professionally. I just couldn't play higher than 10/20, it was too scary for me. I was rolled for higher -- much higher -- but psychologically I couldn't do it, in part because I had to pay rent every month. So I think that like a 19-year-old living with his parents and someone who owns a 200k house free and clear both had advantages over me when it came to psychological bankroll factors. Now it doesn't have to be a house -- 200k sitting in a CD would probably be just as good -- but I really think that for gamblers (and Buffet qualifies here imo) you need to have a chunk of money set aside and not at risk in order to be able to be appropriately aggressive with the rest of your assets.

For sure it doesn't apply to people with stable incomes. Hence Heinlein specifically referencing artists and gamblers.

Would it have to be as safe as a CD? I think as long as it was an investments that were independent of gambling it should be fine. That was what I was trying to get at in my first paragraph.

For say a gambler who is making $80k/year this is a legitimate concern but there really isn't an option to buy a property either. Obviously some exceptions in less expensive parts of the US but in the more desirable parts it just isn't going to be realistic. They have to rent or have a mortgage.

For a gambler who is making enough that he could realistically pay cash for a house a year or two in should have enough funds that he has put the money to work in other ways not poker related.

I don't disagree that having all your income come from one unstable source is scary but that doesn't mean that the solution is to run out and pay cash for a property or put money into a super safe but also very low ROI investment. The correct play is to look for independent investments that have a good return and a good return / risk ratio.

It doesn't have to be stable income from employment though. As long as you have multiple independent sources of income even if they are all individually unstable you should be comfortable.

If I were to start gambling for a living again for me to really do Kelly-type betting I would want like one year of expenses in a savings account and probably two years in an index fund segregated from my bankroll. I played poker for a living for like 3 years and yeah I was in the like 80-120k range for all those years. Which was a nice living for me and I saved most of it but after taxes and expenses it wasn't enough for me to feel comfortable being really aggressive.

For Buffet specifically he couldn't really put his safe money in an index fund because if he was long in his stock investments that would be correlated to his business. So for him paying cash for his house probably was a pretty good play. For a poker player it would probably be better to have the not at risk side money in an index fund or something.

Your risk aversion is considerably higher than most people's and if it is what you need to feel safe then there is no arguing with that but it does hurt your wealth accumulation compared to an alternate you with everything the same except the risk aversion.

You might be right about my risk aversion being higher than most people's but I mean a year of relatively frugal living, so like 25k in a savings account and 50k in a mutual fund.

And keep in mind that true Kelly betting (even half kelly betting) seems very very aggressive. And if you're wrong about the size of your edge it can very quickly lead to disaster.

I don't disagree on the Kelly betting -- using 1/3 Kelly I had slightly more than doubled my starting baseball bankroll and in less than a week all the gains were gone and I was 20% below starting bankroll. I have since doubled again, gone back to even, and then doubled again.

I also agree that when it comes to amounts like $25k then it doesn't matter all that much if you keep it in cash. The conversation was about mortgages which represent considerably more money. Real estate in Canada is expensive so from my perspective we are talking about having $500k in dead money if you pay cash for an average property and for something nice considerably more. Someone living in areas of the States where you can buy decent properties for $100k this is less of a concern but paying cash for a $500k+ property is a horrible decision.

Well specifically we were talking about Buffet's mortgage in 1956, which is a little more than 200k in today's dollars. If he needed that much set aside to feel secure in using Kelly betting (idk if he was aware of Kelly betting that early in his career, but whatever) with the rest of his money, then he wasn't making a mistake as some have said.

The only reason we are talking about Buffett's mortgage is because Buffett fanboys brought it up as an argument from authority that having a mortgage is bad. This question that you brought up involves Buffett's psyche and not something I'm qualified to address. Buffett is also ridiculously frugal so there is likely some mental issues at play that I have no interest in understanding.

I'm more than happy to just say that given Buffett's other odd behavior that for Buffett specifically this might have been the correct decision. That doesn't change the fact that he is over a billion dollars poorer than alternative Buffett with a more reasonable view of risk. My issue is only with Buffett fanboys using him as an example for why you should pay for homes in cash.

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I don't disagree with you except for one thing. I think that if Buffet used anything approaching Kelly betting then putting 200k into his house and a million into his business isn't an unreasonable or abnormal view of risk. I think that's actually a more aggressive allocation than the vast majority of people would feel comfortable with, assuming the business is their only source of income.

How do we know Buffett did not mortgage his home?

I've never heard he specifically payed cash for it.....

It is more like telling a fat person about running and walking. It doesn't matter that running will help them lose weight faster if they are not going to actually do it.

I could find no indication that Buffett didn't have a mortgage when he bought his house.

Also, he didn't invest his money in his business, so what he did with his wealth accumulated up to that time (about $140k) is not important to the returns he would have gotten. Smart people bet using other people's money:

Pretty sure that you have wasted your time here.

I agree with this from a best way to maximize wealth standpoint but from a personal standpoint I could never do that. I realize that is a leak but so be it.

Most of you miss the main point, as usual. Here you have Warren Buffett, the greatest investor in history, who paid cash for his house when it represented a decent ***** of his net worth, and he would tell you that it was the right move.

Now, when his kids went to college, he paid cash for that, too. Most of you financial neanderthals would have advised him to take out loans for his children's education. After all, he was making more on investments per year than the interest rates on the loans he could have gotten.

Buffett currently has over 20 billion in Treasuries at Berkshire Hathaway, and he has always kept a significant amount of cash, yet I would guess that 95 percent, if not all of you, keep far less cash as a percentage of your investment funds than Buffett ever did. You need cash to be able to buy when all hell breaks loose.

You just don't understand what you are talking about. You make the same assumptions that the idiot poker players make, and that is why not a single one of you will likely ever have financial results that will be worthy of discussion.

Buffett paid cash for his house and cash for his children's education. With the theories espoused here he would have been better off getting a credit card and buying his house and paying for schooling, since his returns were far greater than that. You guys just don't get it. I remember reading your garbage a few years ago, when many of you idiots said that the market goes up 9 percent long term, so you should keep a mortgage, since you can invest and make more than that. Losers talk like that. Period.

It really is embarrassing.

Contradicting yourself nicely in that post.

You both need cash to buy when all hell brakes loose and also should pay cash for an asset that contributes a huge % of your net worth. Literally the complete opposite argument given in the same post.

Sound advice!

potleemit,

Do you disagree that if he had invested $25,000 in his own company at the time he bought the house he would have an extra $1.2 billion now?

You are sitting here trying to argue against math because some guy that you idolize managed to become very wealthy despite having leaks.

Further your post is internally inconsistent you point out that you need cash available to take opportunities present themselves while simultaneously advancing that it is correct to tie up a huge portion of one's wealth in a residence. I don't find anything about Buffett worth knowing so I have no idea what motivated the man to make such a huge amount of money yet continue to live like a pauper but most people have no such inclination. I'm not even in the parking lot of the ballpark Buffett is in when it comes to wealth but there is no way I would ever entertain the idea of living in a $500k property. I can do the math and paying cash for a property would at a minimum cost me $700k in the first ten years and $1.6M in twenty years. How can you possibly argue that having $1.6M less is a better outcome?

Smart people do not over leverage themselves. It doesn't matter if you have above average returns for a few years because one bad year wipes you out completely.

I dont disagree with your point but it would have been lunacy for him to make the decision on that basis. I also suspect Buffett would claim there was less risk for him in not having the debt.

From what I've read he would applaud the no mortgage and no personal debt ideas wherever possible. Not sure he would be so keen on paying off cheap debt before expensive debt like Ramsey advocates but he might as he seems to advocate the easy over the optimum quite a lot. Its easy to underestimate the value of easy.

Currently reading this book trying to fix all my debt issues. Granted, they aren't near as bad as people in this book, but I can't wait to get rid of all my debt. Student loans will be the worst. Don't think I will go extreme like he says and put in hours at extra job and such, but I will limit myself to a "less nicer" but still reliable vehicle instead of a sports car I don't need. That's a major thing I will have to get over, because I am one of those people who would have car pmts til I die.

Still looking for any indication that he actually, in real life, paid cash for his house...

Even if he did, it would have been a relatively small percentage of his net worth. I'm extrapolating, but it would have been somewhere around 10% of his net worth.