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This has been going around it seems. Notes from a talk that Buffett gave a couple weeks back. The transcript is great, and the insights are bountiful.
From Underground Value, Notes from Buffett Meeting 2/15/2008
Read through, but here are a some good quotes:
That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.
I know too many people from the forums that think they can spend a little time a week and make themselves rich. Not gonna happen and Buffett agrees, and here’s the kind of person you’re up against, and the kind of person you have to be if you want to make serious go at anything other than index funds:
Markets are efficient most of the time about most things. But for these opportunities, nobody will tell you about them. They won’t be on CNBC and they won’t be in brokerage reports. You have to go find them yourself. In 1951, after I graduated from school, I used Moody’s and S&P manuals as my sources of information. I went through them page by page. I was like a basketball coach looking for 7-footers. I still have to find out if he’s coordinated, and can stay in school…On page 1443 of Moody’s, I found Western Insurance Securities. It had earned $21.66 per share 2 years ago, and earned $29.09 last year. Over the past year the stock was selling for between $3 and $13 per share. I still had to do the work to make sure the earnings were valid. The markets will get it right eventually. But they are there. You don’t have to find too many. Finding 10 of these opportunities in your lifetime will make you so rich. But you can’t be wrong. You can’t have any zeroes. A list of big numbers multiplied by zero will equal zero. You can’t go back to “Go”.
Are you trying to play the stock game? If so, are you reading thousands of pages of reports looking for the right investment? Are you certain that your method will produce no zeros? If you’re gonna do it, take it seriously. Even just a few hours a week is silly and leaves you undereducated, and unable to react quickly (or not react at all) and rationally when times require it.
A couple more, there are tons behind the original link. Reading the full post is a must.
As Bertrand Russell says, “Success is getting what you want, happiness is wanting what you get.” I won the ovarian lottery the day I was born and so did all of you. We’re all successful, intelligent, educated. To focus on what you don’t have is a terrible mistake. With the gifts all of us have, if you are unhappy, it’s your own fault.
We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.
Those are just random ones I grabbed from the long read, so I didn’t have to even try to get good quotes.
I’m already convinced that index funds are the best choice for a person’s core investments, but the studies into index fund performance versus actively managed funds keeps coming out, and the news is always getting worse for the active funds. Here’s a couple highlighting the sad state of the “expertly” actively managed funds, those investments driven by the profit motive of beating the market – a game full of fools.
“The year 1998 was certainly the one in which active managers had plenty of opportunity to add value, either by moving to cash or by choosing winners…Let’s look at the facts. The 164 actively managed emerging market funds tracked by Morningstar fell 26.9% in 1998, far more than the 18.2% loss by the Vanguard Emerging Markets Stock Index Fund…an underperformance of nine percent, not including the further expenses of taxes on fund distributions.”
No major winners in either pack with both options losing big, but you have to assume you’ll lose at some point when dealing with the stock market. That’s why the real winners have long-term outlooks in terms of years not months, weeks, or day, buy and hold – forever if possible, as Warren Buffet says. It’s just as important that you limit your losses when times are bad as it is bringing in the profit when the times are good. The lower your volatility, the better your results.
“Through examination of current and survivor-bias-minimized fund data, as well as other academic studies on this issue, we find that index management outperformed active management in most asset classes.
Surprisingly, index management outperformed active management in the Small-Cap Value and Small-Cap Growth asset classes—precisely the asset classes where one would expect active management to outperform.”
Index funds aren’t perfect, but they’re undoubtedly a better investment than active funds. Index funds help simplify the equation while providing on average better overall returns and lower overall losses without the guess work of picking this year’s winning active fund over this year’s vast selection of actively managed losers.
I’ll end this post with the words from a wise man, John Bogle’s speech given at the Risk Management Association:
“Think about it. When investors—individual and institutional alike—engage in far more trading— inevitably with one another—than is necessary for market efficiency and ample liquidity, they become, collectively, their own worst enemies. While the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates, those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted. Thus, while investing in American business is a winner’s game, beating the stock market—for all of us as a group—is a zero-sum game before those costs are deducted. After intermediation costs are deducted, beating the market becomes, by definition, a loser’s game.“ (page 11, Black Monday and Black Swans [pdf]) I recommend reading the whole thing, great speech.
A bit of a rant here. Blowing off some steam for yall’s pleasure.
I’m out to dinner at a local Irish pub with three friends. Somehow the conversation shifts to stocks. I keep my mouth shut the whole time. I’m so awed by the ease of ignorance, especially from friends, I’m left speechless. I want to pour their beer on their heads and hit them with their mugs.
One guy, the oldest in his mid to late 40s, is outed as the investing failure. “Whatever he does, do the opposite because you’re sure to make money.” He plays the market timing game, and loses often. I guess he recently sold Apple just before the stock shot up. Why he bought or decided to sell, I don’t know. He also sold gold commodities at a loss too, and his thoughts on this were, “I’m the only person who can buy gold during wartime and lose money.” All I want to ask is, do you have any clue how commodity markets work, wartime or not? Do you have any idea how gold is effected by world trends? Actually, that’s not all I wanted to ask, but where he gets his assumptions on how and why to trade in gold, or even Apple stock or any of the other stocks that he sold at the wrong time, is beyond me, and why he keeps doing it is also beyond me. Or at least why he keeps doing the same thing without have much of a clue why he does it is beyond me. Is self-education really that hard? People say my generation has a short attention span, but how else could one explain the continuing actions of the older generation?
The other guy, the second oldest in his late 30s, recently bought stock in a health company of some sort. His reasoning, at least the one he gave at the table, was that Obama has been pushing his universal health plan. Maybe there was more logic behind it, but I doubt it. First, Obama is running for president, he isn’t president yet. Second, there are plans from 4 other candidates, not including plans from people not running for president, which have striking differences from Obama’s plan that may or may not help the health industry or that one company. Why that one company he purchased is in any better position to benefit at all is very questionable. Of course, all of these plans are years if not at least a decade away from even happening, if at all, so I’m not sure I’d bet my money today on something as far away and unpredictable as Obama’s universal health plan.
The only upside to this whole conversation was that the last friend, youngest of us by 10 days, didn’t have any of his own stories, but instead teased the oldest about his poor market timing skills. He’s definitely in a better spot than the others, but I want to bow my head in shame when they all talk stocks and no one even thinks to ask my input. Me being the only one at the table who’s even worked in investment banking, has a degree that at least taught me about investing even if it’s not a finance degree, and the only one who actively researches and studies these things. I don’t want to be the authority figure in the group, and I’m not trying to be the final say, but that so many silly and misleading statements could be made without a thought of getting feedback is disappointing. It’s like diagnosing an illness you have with a doctor sitting next to you, but never thinking to ask for the doctor’s thoughts.
It just makes me want to scream. I speak up when it feels appropriate, but too much of our talks are just idle chat. Personally, I love challenging assumptions and beliefs, and sometimes it’s like the world would rather sit back and watch than think or god forbid do something. Maybe I just need a different breed of friends to satisfy that side of my personality, but I don’t know where to find them. Still, I’m an optimist, even if this rant doesn’t feel optimistic.
[Disclosure: I received a free copy from the publisher.]
This is a book all investors should own, especially if you’re looking for a place to start learning. If you’ve been a part of the indexer crowd, then it won’t reveal any surprises, but it’s a good quick read at just over 200 pages that re-enforces a basic, simple, common sense understanding of investing. John C. Bogle, founder of Vanguard Group, has written a book that should help beginners see what their options are and how to go about investing, and it should also help anyone experienced with investing, but wanting to understand the enormous advantages of index funds. The one fault I have for this book is that it’s missing a major section of the investing population as it’s written at an audience that already considers themselves investors. Although, it’s probably expecting too much from any book to cover so much ground for such different audiences, so that shouldn’t stop anyone from picking up this little book.
As the book progresses each chapter covers a little more information on investing, but there’s one basic theme throughout all of them – low cost, cap weighted, index funds will provide you with the simplest and most guaranteed return. From the first chapter, which highlights the problems with the current investment industry through a parable about the Gotrocks family (a story adapted from one told by Warren Buffett), to the last, you’ll have a hard time dodging all of the facts thrown at you like balls thrown at a high school principal sitting in the school fair’s dunking booth. Actively managed mutual funds just don’t have a chance, and each chapter makes that more obvious from multiple angles. Again, nothing surprising for anyone who’s studied up on index funds, but it’s nice having that reinforced by John and the many successful investors, professors, and business people that he quotes in the book at the end of each chapter.
All of the praise aside, I’m still waiting for a heavy weight in the industry to reach out to the smart savers. Those people who don’t consider themselves investors as they’re just putting away some money here and there, not watching the market, but still putting a portion into investments in the market like a 401(k) or a Roth IRA. They understand that a return matters, especially compounded return, and that a savings account doesn’t compare to an equity fund. Still, they’re looking for a simple and safe option that lets them step away and concentrate on their life and not day to day market events, which is why index funds are just right.
Both audiences use the same strategies and have the same options (index funds), but they approach the topic from different point of views. Either way both would benefit from reading this book. Showing this is my favorite line from the last chapter, What Should I Do Now?. It’s spot on for this blog as John writes, “You must now be as exhausted as I am by the unremitting pounding of my theme that simplicity is the answer and that complexity simply doesn’t work” (p201) [emphasis added]. After reading through this book and understanding the very basic “arithmetic of investing,” there shouldn’t be much question about the validity and proven success of this simple strategy.
Recommendation: Buy it now.
Pros: Easy and fast read packed with loads of eye opening facts.
Cons: A good starter and intermediate book on investing, but still not aimed at the smart saver. It’s all about investing and money, and nothing about the investment life cycle beyond the investment itself.
* For those looking for even greater insight and a good second phase after you’ve read John Bogle’s book, check out a copy of Richard Ferri’s books, especially All About Asset Allocation or All About Index Funds in the side bar links.
The eternal struggle of when to sell stocks and funds has hit home for me. While we’d like this process to be very mechanical, it’s actually very emotional, and that can be dangerous if you aren’t able to control your emotions. Here’s a simple guide to help protect yourself from making silly mistakes or becoming overly emotional (I first set out two rules, then turn them into one rule).
My story is that I’ve been planning a trip with a couple of friends to vacation through Southeast Asia, and it’s about to happen – we’re buying tickets now. One of those friends flies out frequently for work, so he knows the area relatively well, and has a made a number of friends and connections that can help us when we’re there. So, I need to free up some cash so I can buy the tickets as I keep as much as I can invested (and growing) until I need it.
Selling some portion of funds to pay for this, which I’ve been planning, so I know I have the money saved, makes the when-to-sell question quite easy. I sell when I need it, which is rule #1:
Rule 1 – Sell when you need it, not when you don’t. You invest your money for a future purpose, so you should sell when you need to take an action. Remove the environment of the market from the equation as the market doesn’t react to your specific situation.
Now, I hadn’t set a date ahead of time for selling because the plans haven’t been set in stone until a few days ago. The best way to go about this, as it removes as much emotional reaction as possible, is to pick a date as much as a week or two ahead of schedule, and set it in stone through some auto sell-by-date option. You should be able to set a sell date when setting up the sale, but in my case, I just said sell now.
To my fortune, the fund has gained a few percentage points in the last couple of days because the market seems to like the fact that a regularly scheduled FED announcement said they wouldn’t raise interest rates (and probably for a few other reasons too). Had I focused too much on this coming announcement, I may have tried to sell early because I expected bad news, or I might still not want to sell as I planned because I’m reacting to what the market did (either hold longer if I expect more gains, or hold longer because I want to recover from some loss). As you can see, I’d no longer be focused on the reason I actually want to sell, which is my trip, but instead because of expectations I have with the market – expectations that I have no control over or real way of understanding (beyond flipping a coin).
Rule 2 – Don’t plan your sale around short-term shifts in the market. The market doesn’t move around your life plans, so don’t plan around the market. This is when you get emotional because you don’t know what will happen, and worrying about short-term gains (or losses more often) will only lead you into a lose-lose situation. You already have a good reason for selling, so keep your eye on that.
Since this is a blog about removing complexity, and keeping personal finance simple, I’m stopping at 2 rules, and really it could be one rule:
2 Rules as 1: Selling is about planning, not reacting, so sell for a reason like needing the money for a specific purpose or regularly planned rebalancing (if you do this). With the exception of catastrophes (and even then probably not), don’t planning around market expectations because they will bite you in the butt.
To finish, lets assume that I let my emotions take over, and I sold based on my market expectations, and lets also assume I lost money by holding onto the fund after the announcement. Now, I’ve been scarred by this. Humans hate loss, and we do what we can to protect ourselves. Next time there is an announcement, I might feel anxious and want to sell for no reason other than avoiding a temporary loss, which actually costs me money in transaction fees to move the money around, and that’s a loss in itself.
If you go down the road of reacting to the market, the short-term market, then you’ll start to become like many of the traders I used to know who would get anxious, maybe even losing sleep, about potential loss and overconfident about gains both of which they had little control over. Even trying to predict the long term market has big risks, which is why holding the whole market is in most cases the best option (in both risk and return).