A Lesson From The Grandfather of Warren Buffett



Take a minute and read this letter in its entirety. I promise you won’t regret it. It is a letter written from Ernest Buffett (Warren’s grandpa) to his son Fred (Warren’s uncle) in 1939:

Dear Fred & Catherine:

Over a period of a good many years I have known a great many people who at some time or another have suffered in various ways simply because they did not have ready cash. I have known people who have had to sacrifice some of their holdings in order to have money that was necessary at that time.

For a good many years your grandfather kept a certain amount of money where he could put his hands on it in very short notice.

For a number of years I have made it a point to keep a reserve, should some occasion come up where I would need money quickly, without disturbing the money that I have in my business. There have been a couple occasions when I found it very convenient to go to this fund.

Thus, I feel that everyone should have a reserve. I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund by placing $200.00 in an envelope, with your name on it, when you were married. Each year I added something to it, until there is now $1000.00 in the fund.

Ten years have elapsed since you were married, and this fund is now completed.

It is my wish that you place this envelope in your safety deposit box, and keep it for the purpose that it was created for. Should the time come when you need part, I would suggest that you use as little as possible, and replace it as soon as possible.

You might feel that this should be invested and bring you an income. Forget it — the mental satisfaction of having $1000.00 laid away where you can put your hands on it, is worth more than what interest it might bring, especially if you have the investment in something that you could not realize on quickly.

If in after years you feel this has been a good idea, you might repeat it with your own children.

For your information, I might mention that there has never been a Buffett who ever left a very large estate, but there has never been one that did not leave something. They never spent all they made, but always saved part of what they made, and it has all worked out pretty well.

This letter is being written at the expiration of ten years after you were married.

Ernest Buffett

I spend most of my time talking about investing, but what Ernest Buffett says in this letter is far more important than what I usually write about. This is the building block of everything. If you do not have adequate cash reserves, you can be brought to your knees. You can undo years and years of good work. Liquidity is the most underrated thing in all of investing. Please, please, never put yourself in a position where you “have to sell.” The amount varies from person to person, but please, find a way to stash away a few thousand dollars somewhere where you won’t touch it. The first rule of being investor is that you need to put yourself in the position to be an investor.

Wachovia was once an excellent bank. It existed for over a century. Quality wise, it was up there with US Bancorp, JP Morgan, and Wells Fargo. Management and shareholders thought they were the shit. The earnings went up every year. Dividends grew every year. The company was a dream bank holding. Then, in 2006, the company began sacrificing its liquidity to maintain its rate of growth. You know what happened. Two years later, the financial crisis, the company had no liquidity, and despite having over $40 per share in book value, the company got auctioned off for pennies on the dollar. Don’t be a walking, talking Wachovia. Take care of your liquidity, and you can buy like Wells Fargo, always taking advantage of crises because you have a fortress balance sheet. We see a deep recession or two every generation. It’s no secret that it is going to come. Treat this recovering economy as an opportunity to bolster your arsenal. So many bad things in life can be avoided simply by having cash in hand.

Originally posted 2013-06-06 11:59:42.

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21 thoughts on “A Lesson From The Grandfather of Warren Buffett

  1. joespr says:

    Nice letter from grandpa.

    But my question is about
    your comments about sacrificing liquidity to ‘maintain growth’….
    “…the company began sacrificing its liquidity to maintain its rate of
    What are the red flags that would warn run of the
    mill investors like myself that a company is sacrificing its liquidity
    to maintain its rate of growth??

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