Warren Buffett is a genius, he’s also (wildly) rich. He’s one of my life heroes. Having extensively read his material for close to a decade I can honestly say I passionately agree with everything he says and writes. Literally everything.
Warren Buffett and his partner in business, Charlie Munger, have approximately 150+ years of life and investment experience between them. It’s no coincidence that they are considered fountains of knowledge and very wise (old) men. It’s said that Warren Buffett is the guy that everyone quotes but whose advice few follow. That is the premise of this article.
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 and for years they’ve been publishing their quarterly and annual statements online for all to consume. This is a treasury trove of priceless material. I’ll emphasis that again, it’s priceless.
Every year they run the Berkshire Hathaway annual meeting, in Omaha, dubbed the Woodstock of capitalism. This year (as always) he was extremely vocal about how the average person should invest in order to be financially successful. It was also the first year it was streamed live across the world. Yahoo Finance got the gig. Here’s the linkhttps://finance.yahoo.com/brklivestream/ If you’re pushed for time watch the key section which runs from 2hours 42 minutes. Buffett calls it a sermon.
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.
We’re now eight years into this bet and, just for the ones keeping score, the S&P 500 is currently up 61.8% and the hedge funds are only up by 21%. 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).
We’re in unprecedented times, we have never had the current number of affluent global citizens living so long in retirement. Unprecedented. That the baby boomers not outlive their capital is of paramount importance and a major social challenge.
Individuals now control more capital than ever before and are required to strategically invest this money over decades and ensure it’s purchasing power (if inflation doesn’t hammer it) over a 30/40+ year time horizon. I lose professional sleep over this matter.
There are only a few people intellectually looking for solutions to this (many are highlighting problems — mainly market participants that have never seen a client). Most have a vested interest in some product/survey/plan/idea and actually exacerbate the problem. Wealthy retires are not equipped to intellectually tackle this major problem. The financial media (a.k.a financial pornography) continually confuse investors and distract them from the unvarnished truth. They are hell bent on news and have never been purveyors of financial truths.
So what might Warren Buffett do?
So what might Warren Buffett do if he was your financial adviser? (This is obviously just my take based on his previous commentary and studying his wise words and his financial truths.)
Warren Buffett is countercultural and valiantly fights against conventional wisdom (the incorrect current practices). So what might Warren say if he was advising private clients on how to achieve and maintain financial and life success. Of fundamental importance is not out living your money and leaving a meaningful legacy.
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. He did mention Vanguard would be a good choice. He then said place 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 property, commodities, options, managed futures or any other hot fad or ‘alternative’ asset class (investment noise). He’s kept it incredibly simple. He hasn’t overcomplicated 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). This is investing 101, understanding that temporary downturns in the market are just that. I have a smile ear to ear when the markets offer me temporary sales.
Financial advice à la Buffett
If Warren Buffett was in front of financial advice clients 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.
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 don’t need you to complete a risk survey, which was never designed to make you a better investor or even help you understand the behavioural challenge you face. I also don’t need to over analysis your portfolio. The truth is your investments will underperform to the extent they are lacking great companies (which we call equities).
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. Some clients have asked me why they are paying me on an ongoing basis to do ‘nothing’? My answer is always you wouldn’t have come to this conclusion without me, therefore my fee is priceless and provides exponential value.
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 underperform 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.