Investment advice on how to beat your neighbours, from the worlds greatest investor.
Warren Buffett is a genius, he’s also (wildly) rich with a personal net worth of $81.2 billion. He’s one of my life heroes & on top of this he has donated over $54 billion to charity. It’s said that Warren Buffett is the guy that everyone quotes but whose advice few follow. If he was your financial advisor you would probably not hire him – he is not chasing the next hot thing, trying to time the market, beat the market with trading activity, in fact he is the complete opposite, so to many he is boring, outdated etc..
Warren Buffett lives a very frugal life. He’s lived in the same house for 58 years, valued at around $400k. He only has one house (his fellow billionaires collect them). He doesn’t eat in fancy restaurants. He does wear expensive suits, however he says they look cheap on him. He does fly in a private jet (well, he is a billionaire). His rich friends have armies of staff and multiple homes across the globe. However he says, the things people own, end up owning them.
Warren Buffett and Charlie Munger run the investment/business powerhouse that is Berkshire Hathaway Inc. During this time Berkshire has lost half its value three time but they have remain completely unphased. Believing strongly that stock markets declines are only temporary and that markets move permanently upwards because they capture human ingenuity.
In 2008 Warren Buffett waged a bet with the hedge fund Protégé Partners. The premise was that Warren Buffett would back the S&P 500 Index fund and Protégé Partners would pick a basket of hedge funds. The winner would be the highest performer after 10 years of investment returns after charges (this is important). The bet was for a million bucks, not chump change for us but for Warren Buffett this is an hour’s overtime. None-the-less he doesn’t like losing money; it’s actually his first AND second rules when it comes to business.
This is the most public bet ever conducted between two smart market participants — one taking the side of the passive approach (just buying the market) and the other paying smart people to continually outsmart the market (the active hedge funds).
Result: Buffett +125%; Protégé +36%.
Was this just luck, good timing … I have enclosed more information on this bet below to help you decide.
SO WHAT MIGHT WARREN BUFFETT DO IF YOU HIRED HIM?
So what might Warren say if he was advising you on how to achieve and maintain financial and life success.
His faith in global capitalism is unrelenting, he believes that over time companies will innovate and return profits to the shareholders that own these companies. He’s told his widow that when he pops it she should place 90% of her assets in an index fund which tracks the top 500 companies in America, the rest of your assets in cash, for everyday spending and to ride the volatile temporary declines in stock prices.
You notice he hasn’t mentioned commodities, options, managed futures or any other hot fad or ‘alternative’ asset class (investment noise). He’s kept it incredibly simple. He hasn’t over complicated for profit.
He’s also a huge fan of not watching market prices or, as he says, Mr Market. Basically invest and forget. This reflects the old adage that money is like a bar of soap the more you touch it (look at it) the less you’ll have.
He’s also famous for saying be greedy when others are fearful and fearful when others are greedy. Basically, if you are investing money as opposed to spending it, you should be ecstatic when the markets are temporarily down (as all downturns are temporary).
FINANCIAL ADVICE À LA BUFFETT
I think he might sum up his advice like this:
Mr Investor, the world is trying to get your attention and divert you away from the unvarnished truth about financial success. Skyscrapers are built on investment lies & Wall Street gets rich on investment activity.
You need to put money aside for any known expenses that you have coming up in the next three or so years and also have a cash buffer of approximately 10% of your investable assets. The rest put to work in a super cheap index fund that tracks a collection of great global companies.
Ideally never look at the value day-to-day or even month-to-month. Even yearly is a pointless arbitrary date. We know that over the coming decades the reason for your superior returns from owning great companies is that you are disciplined through the temporary downturns. If you can’t agree with this truth, you’ll never be a successful investor.
I guarantee that if you follow this buy and hold strategy you’ll not outlive your capital, you’ll maintain a high level of purchasing power (your money keeping up with the prices of the day) and you’ll perform better than all of your neighbours. Also a healthy legacy can be passed down to your loved ones.
I will help you create a multi-year financial forecast to help plan the key events in your life and your spending patterns. I will charge you for this work but I have to be brutally honest, I won’t be doing much ‘work’ once your plan is set up and follows the truth about investing success.
My main role will be ensuring you stick to this plan and stay on track (this is far harder than it sounds), because the media and other purveyors of untruths will be trying to flag you down at every opportunity they get.
My final point is that study after study has proven that bad investor behaviour (misbehaving) is the most destructive wealth destroyer of all. It is calculated that an individual investor (due to continually misbehaving) will under perform his investment potential by circa 50%. Which means left to your own devices you’ll receive half the returns (or wealth) you are entitled to due to making the wrong decisions at the wrong time for the wrong reasons. Weirdly the very lazy investor trumps (by a considerable factor) the hyperactive action-seeking investor.
Finally, I can only continue to work with you if my advice is uncontested. There is a professional fantasy that all clients should understand the advice their adviser shares with them. Personally I know you’ll never fully understand me; all I ask is that I am believed. Also expect that I will continue to deliver uncomfortable truths and not the comfortable lies to which many of you may have become accustomed.
As promised, more information on the bet –
December 2017 marked the end of a 10-year bet Buffett waged with a hedge fund firm Protégé Partners. And the bet was this:
Each gets to choose an investment for a 10-year period and the best performer commits to pay the other $500,000 (so a total pot of $1m to be donated to a charity of the winner’s choice).
Buffett’s pick was a low cost investment in an unmanaged S&P 500 index fund. Protégé Partners, picked five “fund-of-funds”. Those fund-of-funds in turn owned interests in more than 200 hedge funds.
Let’s cast our mind back to December 2007. The housing crisis in the US had already started and the early signs of stress in the banking sector had begun to appear. The run on Northern Rock in the UK was the previous September. At the time of the bet, it looked like an active approach was the right call. A static bet on the US stock market that had been on a tear since October 2002 looked almost naive.
The managers of the five fund-of-funds possessed a further advantage: They could – and did – rearrange their portfolios of hedge funds during the ten years, adding better funds while exiting those hedge funds it deemed unworthy.
So how did it pan out?
The hedge funds got off to a good start, each beating Buffett’s index fund in 2008. Then, as Buffett says, “the roof fell in”. In every one of the nine years that followed, the fund-of-funds as a whole trailed the index fund. Result: Buffett +125%; Protégé +36%.
Many of the investors in the hedge funds experienced a lost decade, though not the managers. As Buffett quips, “Performance comes, performance goes. Fees never falter.”
I’m not naive enough to think that one bet for a single ten year period allows one to draw much by way of conclusion, but Buffett has been highlighting the following lessons for over half a century now.
Lesson #1: A low cost, low turnover approach won out. Despite great resources and even greater incentives to perform, the actively managed approach came up well short. An investor would have needed a fair dose of fortitude to withstand the early losses but it is ever thus with stock markets.
Originally, Protégé and Buffett each funded their portion of the ultimate $1 million prize by purchasing zero coupon U.S. Treasuries at an equivalent yield of 4.56% – so in effect they only had to part with $318,250, knowing that after 10 years this would compound up to $500,000.
By November 2012, the bonds they bought had increased significantly in price and the yield (which moves inversely to the price) had declined to less than 1%. The cash return from dividends on the S&P 500 at the same time was 2.5% annually, about triple the yield on their bonds and with a long history of growing from year to year.
Protégé and Buffett agreed to sell the bonds in 2012 and use the proceeds to buy 11,200 Berkshire “B” shares. The result: more than $2.2m was donated to charity rather than the $1 million they had originally pledged.
And this is lesson #2. Buffett has long been disparaging of the academic view of risk, which equates it to volatility or the dispersion of returns. In Buffett’s view investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that you fail to meet this objective.
We tend to think about money in nominal terms – euros and cents in our bank account. In no long term sense is this money. In the long run, the only rational definition of money is purchasing power. If my living costs double and my capital and interest thereon remain the same, I have lost half my money. If money is purchasing power, risk then becomes that which threatens it and safety that which preserves or enhances it.
Buffett’s switch in 2012 from bonds to equities would be categorised by an academic as having increased his risk; outside of the walls of academia, this makes little sense.
The final lesson from the Buffett bet is the advantage conferred to those that eschew activity with their investments. Buffett made one decision in the ten years. The 200-plus hedge-fund managers that were involved almost certainly made thousands of buy and sell decisions. I’m not drawing a line of causation from a simple do nothing approach to easy riches, but there is undeniable correlation.
I long ago realised I’m no Warren Buffett. But you don’t have to be a genius to see the profit in applying the simple lessons from his bet.
The $6,200,000,000 question
$6.2 billion, is roughly how much Warren Buffett’s personal shareholding in Berkshire Hathaway Inc. declined in value between July 17 and August 31 1998. During those 45 days, how much money did Buffett lose in the stock market? The answer is that he did not lose anything because he did not sell. Did he predicted the decline and subsequent recover, NO he did not. He simply followed his own advise and had great faith in his holdings, had faith in the long term trends of the world economy. He did not panic or listen to the press, who were forecasting doom & gloom.
PS if you are having trouble getting Buffett on the phone please feel free to give me a call on 0868290989 and plan for a boring financial life. You tube video at https://youtu.be/ctO7tTl2Ug0
Kevin O’Neill is a Qualified Financial Adviser and member of the Life Insurance Association of Ireland , Trusted Advisers Group and Professional Insurance Brokers Association. Kevin has over 20 years experience in financial planning, working with individual and executive clients.
Kevin established O’Neill Independent Financial Consultancy in 2005 in order to provide an independent, personalised service to clients. Married and bless with two sports mad boys, when not standing on a side line during his spare time Kevin is involved in fundraising work for local charities & trying to keeping fit.
Regulated by the Central Bank of Ireland and accountable to educational bodies for qualifications and continuous professional development (CPD).
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