Investment Planning

The Wisdom of Warren Buffet

After the Berkshire Hathaway shareholders' meeting last weekend, CNBC interviewed Warren Buffet, Charlie Munger and Bill Gates this past Monday. 

Here are some valuable takeaways.

On buy-and-hold, low-cost, index investing:

…this time I went back to 1942 when I bought my first stock as an illustration of all the things that have happened since 1942. We have had 14 presidents. 7 Republicans. 7 Democrats. We have had world wars, 9/11, Cuban Missile Crisis. We have had all kinds of things. The best single thing you could have done on March 11th, 1942 is buy an index fund and never look at a headline... If you put $10,000 in an index fund that reinvested dividends… It would come to $51 million now.
— Warren Buffet

On "investing" in Bitcoin vs. stocks:

“When we buy a business [buy stocks or stock index funds]…we are buying something that at the end of the period we not only have what we bought in the first place but we have something that the asset produced. When you buy non-productive assets [like Bitcoin] — all you’re counting on is whether the next person is going to pay you more because they’re even more excited about it. But the asset itself is creating nothing. 
— Warren Buffet

Rick's note: This can be applied to any commodity - oil, natural gas, gold, silver, pork bellies…or GASP!…your house.   Don't "invest" in something that's only potential return is the next guy paying more for it.  Invest in things that produce - like companies in the form of stocks or stock index funds.

More on Bitcoin: 

And—it’s better if they don’t understand it. That’s the other thing about non-product— if you don’t understand it you get much more excited than if you understand it.
— Warren Buffet

Rick's note:  That thing you heard about that's too good to be true?  Educate yourself and truly understand it before you buy into it. 

On the company you keep: 

It’s very important in life to associate with people that are better than you are. It’s the most important decision — you will go in the direction of the people that you associate with.
— Warren Buffet

Rick's note: Amen.


Lastly, some reading recommendations from Warren and Bill:

Warren Buffet recommended: The Intelligent Investor by Benjamin Graham
Bill Gates recommended: Factfullness by Hans Rosling
Both recommended: Enlightenment Now by Steven Pinker

The Wisdom of Rip Van Winkle

Did you know… on average, since 1900 there has been a market correction of 10% annually?  


Every year the market is down 10% at some point between January 1st and December 31st. 

And 5% corrections happen 3 times per year on average.

The markets had a 10% correction back in January-February.   But only after shooting up 6%.  

Up 6% - down 10% - for a net of -4%.  All inside of 6 weeks.   If you squint real hard, you can see that as a 10% correction.

Cool.  We're average!

But then we recovered 3.5%.  And now we're down -0.55% for 2018. 

If you had Rip Van Winkled it since January 1st and woke up to see your portfolio down 0.55%, would you Chicken Little it the rest of the year worrying about the 5% corrections yet to come?

Or would you just go back to sleep?

Own the Racetrack

Last week, the investment quilt taught us that chasing returns is a great way to slice your long-term return in half.   Buying and selling based on last year's… last month's… last week's returns is a surefire way to buy high and sell low.

And so we buy and hold…. and then hold some more. 

But what do we buy and then hold?   A diversified portfolio.

The "Asset Alloc." in the white boxes stand for Asset Allocation - aka a diversified portfolio.   Notice how it's never the best and never the worst.  A diversified portfolio loves the middle way (points if you picked up that zen reference.)

And because we know it will be in the middle over time, there's no anxiety about what to do.   We don't need to worry if NOW is the best time to buy or sell something.   

We don’t' need to worry if we picked the right horse because we own the whole race track. 

Investment Quilt.png

The Investment Quilt

Colors!  Pretty!!!

Investment Quilt.png

Each colored square is an ingredient in your investment stew.  If you're a client of The Financial Zen Group, most of these ingredients are in your portfolio.

The ingredients are sorted from top to bottom.  The best performing ingredients are at the top.  The worst are at the bottom. 

Look at the first column, for example.  In 2003 "EM Equity" aka Emerging Markets was the best ingredient.  It had a 56.3% return in 2003.   

The worst ingredient in 2003 was cash.   Cash only earned you 1%.

Make sense?

One of the many things the "Investment Quilt" teaches us is that past performance is a lousy indicator of future results.  Therefore you should not "chase returns" by getting in and out of the market based on what it just did. 

Follow emerging markets from year to year. 

It's either the best or the worst.  And it's usually the worst right after it was the best. 

If Wall Street has fooled you into thinking market timing works, then you'll probably invest after it was the best, just in time for it to be the worst.   And then sell it after it was the worst, right before it's the best. 

In other words, buying and selling at exactly the wrong times.  Studies confirm this happens consistently.  The average investor gets half of the market returns because they are always buying and selling at the wrong time. 

The solution?  Never sell.  Buy and hold and then hold some more.  We know the market's long-term return is 10%.  That's pretty darn good.  Why would you mess with that?