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Picking Warren Buffett's Brain: Notes from a Novice 184 Comments
"Excuse me. Where is the most difficult to reach microphone?"
I was out of breath from running up the steps but had managed to find one of the microphone stands, manned by two headset-wearing volunteers.
More than 10,000 people had waited on the sidewalks overnight to be first in the doors of the Berkshire Hathaway annual shareholder meeting, and I had made a choice: I would go for the mics instead of the front row.
Given a choice of shaking Warren Buffett's hand for a five-second photo op or asking him a question, I opted for the latter, and in ten seconds, I'd be sprinting to the corner of the top floor. After all, lunch with Buffett once auctioned off for $620,100, and I'd planned it all out.
These are my notes on what happened and what I learned…
"Can you please radio ahead to put my name on their list until I get there to confirm?" I pleaded, explaining that this was the main reason I had traveled from SF all the way to Omaha, Nebraska.
They smiled: "Sure thing."
There were 13 mics total and time for approximately six questions from each, for a total of 78 people out of the 31,000 who now packed the Qwest Convention Center like a rock concert. I ended up, only 10 minutes after the doors had opened, number 5 at mic #6. When the spotlight swung over to blind me a few minutes before the lunch break, I was ready to consult the Oracle.
"Good afternoon, Mr. Buffett and Mr. Munger…" my voice boomed out through the sound system with a half-second delay, making it almost impossible to remember my lines, memorized word-for-word. I continued:
"If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage."
Buffett let out a small laugh and began. "I'd put it all in a low-cost index fund that tracks the S&P 500 and get back to work…"
[Postscript: Be sure to see some of the great reader answers to this question in the comments after this post.]
An MBA in a Weekend
As several veterans put it to me before the pilgrimage, "it's like an MBA in a weekend." I thought this was hyperbole and hero worship, but I would now take it further: I think it's one weekend that delivers more than most MBAs. Real-world strategies culled from experience? Check. Networking? Big-time check. The only thing the mecca of Buffett seemed to lack was the $100K+ price tag.
Here are my non-linear notes from my exchange with Buffett (B) and Munger (M), as well as the rest of my first Berkshire Hathaway (BH) experience, including conversations in the hallways with some incredible portfolio company managers. Treat each line as a separate observation except for the answers following bolded questions.
Their continued answer to my question:
"…Put it all in a low-cost index fund like a Vanguard 500." M: "Professionals take croupier profits out of the system. No one will give you this advice [index funds] because no one gets paid for it." M: "The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity." B: "There are situations, for the full-time investor, where it'd be a mistake not to invest 50% of your net worth in one business." If more aggressive: small stocks and specialized bonds, but no currencies.
Best books to read for investing and life?
(B) Chapters 8 and 20 in The Intelligent Investor. (M) Anything by Ben Franklin.
Use the market to serve you, not to instruct you.
What's being taught in current MBA programs that shouldn't be?
Option pricing, etc. There are only three courses you need: how to value a business, how to think about market fluctuations, and how to communicate well. There is a great desire of the priesthood [in this case, academics] to teach what they know vs. what you need. If you know the bible in four languages, your ego won't allow you to teach the true essentials, which might be "follow the 10 commandments."
From CFO of portfolio company on how to select a money manager. Ask: What is your process? How do you make decisions? Given what you're holding now vs. 3 years ago, can you share an example along those lines? Are you registered with the SEC?
From same CFO: having a short-term focus (2-4 months) or long-term (7 years or so) is good, but intermediate-term is bad (1-2 years). Everyone is looking at information for 1-2 years due to capital gains treatment. Given that I'd be comfortable with a 10% loss in a given year but not 20%, a 55/45 stocks/bonds split with 7-year objectives would be one potential allocation.
Conventional dogma among economists: the stock market is 6 months ahead of the respective economy.
B: "Envy is the worst of the 7 sins. You feel worse and they feel no worse. Gluttony, at least, has some upside." [said as he opens another box of See's chocolates]
The letter and goodies waiting in my hotel room upon arriving in Omaha.
Select money market accounts with comparable returns to CD have advantage: can invest in crashed S&P same-day.
B and M have never discussed timing the market, and if they could, they would focus exclusively on S&P 500 futures.
Look for attractively priced businesses, not stocks. Could you remain confident in your choice, in their durable competitive advantage, even if the market were to close for a few years? Imagine that you have a card with room for 20 hole punches, and you can only invest in 20 companies your entire life.
Worry about getting ahead, not galloping ahead.
Purchasing businesses that earn revenue in British Pound Sterling, Euros, or Francs is OK, as those currencies are unlikely to decline vs. $ USD. $ USD will continue to weaken vs. others.
B and M's job is to retain — not recruit — good managers once they choose an attractive business to purchase. Good management is part of the evaluation of intrinsic value. Chief characteristics: passion, excellent communication skills, and the tendency to always do more than fair share.
If you want to buy or sell a stock, buy or sell it instead of speculating on futures. If you make a call for a cheaper price, the movement will come earlier 4 out of 5 times.
M on charities/nonprofits: if you donate to a group with strong political leanings, you tend to make lots of dumb charitable gifts.
B: Most things I want do not come from the expenditure of money. I have what I need. We do virtually nothing we don't want to do. Associating with wonderful people is about as good as it gets. Never trade reputation for money.
Berkshire Hathaway (BH) is now targeting companies with a 50B+ market capitalization (market cap) — there are fewer options, the companies are less profitable, and more is required to move the % needle [% growth in BH stock] for shareholders.
M on CEO compensation: If you're in a job you'd pay to have and are an exemplar for the rest of the organization, there is a lot to be said for paying yourself little. B: "If you rise high enough in American business, you have a moral obligation to take less pay.
"Pair trading" — long and short two stocks in the same industry to hedge losses (BP + Chevron, etc.). Useful in 60′s; less useful now.
Press and media are larger factors in changing bad corp/exec behavior than regulators. Boards respond to bad press.
How would you answer my question?
"If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage."
For those interested, here is how I prepared for my "meeting" with Buffett.
Posted on June 11th, 2008
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184 Comments
Your notes are awesome. Thank you so much for sharing!
BTW, I've been eating your eggs/spinach breakfast for a few days now….can't wait 'til my free day!
How long have you been investing Tim? I didn't know you were remotely interested in doing so. Do you see yourself ever starting up again or do you have enough momentum (from BodyQuick and book sales) and familiarity with investment to forgo the process? Thank you in advance for being as specific as possible:)
Excellent stuff Tim! Warren is a smart dude for sure. I'm totally sold out on his index fund investing advice. Another excellent book on investing in low cost index funds is Hebner's Index Fund book.
After reading this, I'm making my plans to go next year.
Based on your assumptions and including an average life expectancy of 85 years, you're talking about a 55 year investment horizon.
If you can stomach the ups and downs, I would go with an all equity portfolio, but instead of going simply with the S&P 500, I would go with a globally diversified basket of low cost, tax efficient index and/or asset class funds.
I would include the entire US stock market (all capitalizations), the entire International developed market (all capitalizations), and the entire International emerging market (again, all capitalizations). I would also add some income producing real estate in the form of a well diversified, low cost REIT index fund.
This can be accomplished with Vanguard funds, ETFs or other flavors of investment.
You can further increase your expected returns over time by tilting your exposures more heavily to small cap and value companies.
Check out http://www.dfaus.com for further data on this approach. They advocate taking the risks that you're compensated for, and I incorporate this approach in my work with clients.
Once your target allocation among the chosen funds had been determined, I would rebalance back to your target allocation when any single asset class deviated 20% from it's target. There is meaningful data supporting this rebalancing trigger. You could also rebalance with additional savings which is a much more tax efficient approach and will reduce your capital gains realization. Rebalancing forces you to buy more of the relatively less expensive asset class in a classic "buy low" discipline.
That's about it. Buy when you have money and only sell when you need the money, but not before.
Jesus, dude.
This is the third post of yours in a row I've shared in Google Reader. And I'm not exactly known as a link slut.
I would never have thought this possible, but I'm actually considering making the trip next year.
Thank you, sweet messenger of financial nerdery. Thank you…
Great notes. Irrelevant as it may be, couldn't help noticing even the richest man in the world uses Times New Roman in corporate letters. Maybe he got so rich not from investing, but by never hiring designers and other "non-essential" services?
Wow! I'm speechless. Great notes!
@Joel Falconer: After Tim's podcast on "The Art of Speed" at SXSW, I purchased "The making of an American Capitalist"
It is a great read! Buffett is certainly a different type of animal compared to other investors.
I would certainly invest with him, but there would be little chance I'd work for him…
Rock on!
I would invest it all in a startup biodiesel company that had a brilliant idea to turn the sludge from wastewater treatment plants into renewable fuel. A million is about enough to build a plant and secure the contracts, then sell out to a larger company for a huge profit.
Brown Is The New Yellow – you heard it here first!
For further elaboration on Buffett's index fund strategy, which is to broadly diversify while keeping expenses as low as possible, I highly suggest checking out http://www.bogleheads.com.
You'll learn more about real life investing than in any B-school and it's free!
Sorry I meant http://www.bogleheads.org. Check it out.
Do you personally know anyone who has ever successfully built wealth mostly from investing primarily in stocks, bonds, mutual funds, and/or index funds?
Also, I just recently did a post about the flaw in investing in index funds. It's actually quite simple and easy to understand.
Btw, as much kudos is obviously due to Warren, it's very hard for me to value advice from a person who doesn't follow it themselves. Aside from the simple minded "invest in index funds and get back to work" (for 4 hours per week?), he has many great messages if you read deeper into his philosophy. I've read several Buffett interviews that were priceless.
On productive alternative side of things, what do you guys think about investing directly into hard assets and private financial instruments where there aren't all kinds of hands in the cookie jar to dilute your returns?
The commenter Russ Thornton has it mostly right. The missing component is asset allocation because its specific to your risk tolerance. Overall, equity and equity like instruments are what you want. David Swenson has a pretty good book on this.
One further point though. A basic tenet of professional investing is to manage your liabilities by managing your assets. i.e. if you are a professional money manager it makes little sense to invest only in the S&P due to the very high correlation of performance/wages. Ditto for company share options. Taking it further one should analyse one's costs in terms of exposure to various asset classes and then find a way to hedge if possible. i.e. if you commute a lot and drive a hummer then oil futures may not be a bad idea to remove the risk of price increases. This idea can be applied usefully in some instances depending on your personal circumstances.
As a new multi-millionaire with an engineer mind, after lengthy research I chose ifa.com for their low-fee access to DFA funds, which are essentially index funds with some academic magic at the edges to maximize returns. Instead of bullshit "how much risk can you handle?" quesitons, they boil it down to the number of years your liquidity horizon is. Check out their site, check out their charts – if you chose them, you'll sleep well at night.
Excellent post Tim – I have to go there.
I will be interested in learning if you ended up following the Vanguard 500 advise – I assume they also suggested not investing it all the same day or?
Although there is no real focus on timing – it does seem to be very resonably priced at the moment.
Lazy Portfolios. Google that, else the concept is similar to that described in David Swensen's "Unconventional Success." The engine is the S&P (and foreign equiv.), but the bonds and rebalancing give you an edge over pure equities.
Great post Tim. Perhaps we can see your notes on the paper it was written? What did you take all your notes on and why did you choose such a medium?
Question: How would you invest your first million dollars?
Answer: Man… I guess that would TOTALLY depend on what you wanted your next 55 years to look like… Wouldn't it?
Seems like some people could move to the Philippines and live off of some low risk interest somewhere. Others would just be getting started on their quest for 1 billion dollars and their next move would look totally different.
I would probably be looking for a business to buy or… I guess do what WB said. Throw it in my S&P500 index fund and get back to work…
My prediction,
This blog will have the most responses to date. Just my gut feeling and seeing the response level at such late hours.. Good JoB!!
Great Notes, thanks for sharing. I have only about 100k to invest into stocks at the moment, its stuck in USD and Im not keen to move it to Euro or AUD at the moment as im hoping for a USD Rally,
WB saying that USD will continue to devalue doesn't sound promising and maybe I should be moving it now rather then investing in the US market.
I Plan on buying Stocks in China companies as their economy is growing rapidly
[...] Picking Warren Buffett's Brain: Notes from a Novice, Tim Ferriss shares the notes he took at a recent convention for Berkshire Hathaway shareholders. [...]
I like Taleb's idea of 90% in government bonds and 10% in highly speculative stocks.
More conventionally, I'd follow a highly diversified strategy as suggested by Swensen (Yale) in his books, adjusting the bond percentage up or down as dictated by risk tolerance:
stock funds:
large blend index ( S&P 500 )
small value index
International index
Real estate Index
Commodities (PIMCO real return)bonds:
Short term treasuries -
Thanks for passing along the notes for us that couldn't be at the meeting. I live in Omaha, so I don't have a lot of excuse but I didn't have tickets. I will next year my family just bought some brk.b shares.
To your ?: Buffett gave you an initial answer about the Vanguard 500, but if you look at his later response, it is clear that what he really means is put it in businesses that earn in the top valued currencies right now. I think his comment about the Vanguard is until you can figure out which business to buy. And by get back to work I think he means looking for which business to buy. Thats all he ever does.
Loving my life with the use of a VA. Amazing things happen when you don't have any excuse not to start something you have been wanting to. When there is no limitation to the amount of time you have, based on the availability of VA's and when there is no limit to the amount of expertise you can get for the ideas that need it it is like twin turbochargers have been added to the engine of your life. I will soon be asking you to comment on my book, what is the best way to do this?
Sean, could you please share the name of VA firm that worked for you?
Future 4 hour work-week success story in Arizona and possibly your future ex-girlfriend:
I first learned about your book while writing my business plan along the shores of Lake Atilan in Guatemala. Upon returning home, I tried many of the techniques from my extensively highlighted book. Most of them failed….so far. "Test and test, again" right? However, i still reference it constantly and so far have found the beginnings of success in wholesaling…
Last summer I worked in Thailand (learned a few Muai Thai boxing techniques) but I am not quite ready for the aboard experience while trying to get this business flowing so….
This summer I am putting my ninja motorcycle in storage and traveling around the US as a tour guide for international travelers. It'll be a "test in lifestyle design" to see if I can fulfill P.O.s from my blackberry. Wish me luck!
If you ever make it to AZ in the wintertime, feel free to drop me a line and I will take you to the track, my treat.
I find it interesting that WB is continually talking about the negative effect that the fees incurred by investing thru an advisor or hedge fund since from what I have read about Buffett's beginnings in the investment advice/management world started with Buffett charging a 2% asset based fee and a percentage of the gains annually.. (Can anyone "hedge fund"??)
Of course, maybe he learned his lesson BUT, it is reported that he collected "hedge fund" type fees in his earlier years..
Great notes, thanks for sharing them.
WRT how I would invest, I think that unless you're willing to get knee deep in investing and doing lots of reading, you have to go with an index fund. Many mutual funds judge their performance and manager alpha vs. indices and a majority of the actively managed funds lag indices. If the majority of professional managers with their resources cannot beat their benchmark, how could you do it consistently and hold down a full time job? (even if it were only 4 hrs a week?) Index funds is the answer and they're cheap to boot. (The Fidelity Spartan 500 index fund has an expense ratio of only 0.10%)
Well, this definitely settles it. I have to get me some BRK-B and make the pilgrimage.
As far as the investing advice, you're a young guy and don't strike me as risk adverse. I would definitely look at heavily investing in foreign stock index funds. I personally hold about 10% in foreign emerging markets small caps and I'm about your age.
The 80/20 principle applies to investing as well. 20% of investors/traders take 80% of the profits. The Index fund advice is great for the masses, but a little more effort yields better results. Here's where my money is:
1. Mutual funds with an excellent track record and reasonable fees. Many financial websites can sort funds by 5 and 10 year performance. Make sure you look at a fund on a chart to get a feel for its volatility.
2. An active investor can smoke the averages by using a discount broker and a stock screen, but most people can't do it. Why? They can't stick to the plan.
Asset allocation is a very personal thing. If you get more aggressive than your risk tolerance, you will bail, probably near the bottom of the market.
BTW, Buffet has stated many times that future returns will not be as good as past ones. It's too big. Make sure you read his annual letter to shareholders (they go all the way back to 1977) located at http://www.berkshirehathaway.com/letters/letters.html
The best thing anyone can read on personal finance and investing is a little book written in pieces from the 1920′s to 1940′s titled "The Richest Man In Babylon" by George S. Clason. It's a great set of stories set in ancient Babylon – which makes it a fun read – teaching savings, how to get out of debt, and how to invest. The investment strategy, when you really look at it, is very similar to Buffett's strategy of buying into a good business and holding it. The book is fun, an easy read, and you can pick one up at any bookstore for $7. I recommend it to everyone I meet who talks to me about finances.
You're out of "Man" Jose? Are you in SF now?
After reading the book "The Collapse of the Dollar", I have put over 50% of my portfolio into physical gold and silver buillion. As our currency continues to lose value, oil and metals will continue to soar.
Tim-Love the post. It was definitely an education.
The response to your question confirms my belief on investing. Unless you can devote a significant amount of time you should just go with index funds. Your time and energy are more profitable earning a larger income. This is especially true if you use it to start a successful business.
Buffet said : There are only three courses you need: how to value a business, how to think about market fluctuations, and how to communicate well.
Can you guys recommend books that cover these 3 functions….thanks,jeff
@ Jeff Nabers
I would stay away from it for the simple reasons that these hard assets and private placements can be hard to get rid of. Valuations can be tough and often, only qualified buyers are eligible to purchase. The upside to having many hands in the cookie jar is that valuation is more standardized and buyers and sellers are easy to come by.
What about Phil Town's Rule #1? I'm about halfway through it. Is anyone using this method, based on Buffett's own "rule" and other strategies from his professor? Tim, I think you said you read it – is anyone using this strategy with success?
Speaking as an actual 2 year MBA (not the weekend kind) who studied mostly the stuff Buffet was saying they should focus on (communications, valuation and market movement), here's my idea for your first million that you don't want to use to start a new business with.
Go 60/40 with the 60 being a low cost EAFE type fund and the 40 being S&P 500 tracking index. You diversify away everything you don't know and you get some edge on a falling dollar with the EAFE. If you were inclined, you could add a Wilshire Completion Index type fund to the mix, but I don't see the point of screwing around with smaller companies in smaller proportions. More risk, more return. But your first million (or fraction thereof), you put into a nice stable, growth option. When you have a second million (or fraction thereof), then you have some money to risk, with a higher risk tolerance.
Of course, this all comes down to your individual risk tolerance. If you have no tolerance for risk, 100% to government bonds. If you have nothing but risk tolerance, you plunk your mil as a venture capitalist. Somewhere in between, lies most people.
I became extremely confident in my personal investing strategy after reading "The Intelligent Asset Allocator" by William Bernstein. The title of the book is a mild retort to "The Intelligent Investor," which informed Buffett's career. (although Buffett's answer to you indicates to me that he would probably agree with most of what Bernstein says)
The highlights:
-Pick an asset allocation and stick to it. There are some rules of thumb about asset allocation, but he most important thing is to stick to the allocation plan you pick at the outset.- Rebalance periodically – every two years or so you should buy and sell so that your portfolio matches your target allocation. If you don't change your asset allocation, you will get a boost in returns from rebalancing. This is why sticking to your chosen asset allocation for the long haul is so important.
- Only use index mutual funds.
Short answer:
25% in a US market-wide (not just S&P500) index fund.
25% in actively managed international funds (equal parts EU/Russia, East Asia, Latin America).
25% in actively managed international bond fund.
25% in US money market/savings.
When picking funds, pick the ones with the best 1, 3, and 5-year returns AFTER annual expenses, with the same manager through the last 3-5 years.Details:
For the most consistent returns you need to diversify intelligently; buying a random collection of 500 stocks of roughly the same size that mostly track the US economy is easy but too risky for the simple reason that few investors like to see their portfolio tank for 2-3 years in a row, and hence will end up selling out at the bottom. And by the way, the S&P500 is equivalent to an actively managed fund; companies are selected and dropped based on a set of financial criteria.
So basically, for the most stable returns, invest in a set of assets that do not go up or down at the same time. That means you need international as well as US exposure, and debt (bonds/money mkt) as well as stocks. -
tim, just out of curiosity, did you actually expect him to answer differently than he did? thats how he answers just about any investing question.
Love your blog, but what a wasted opportunity! The answer to your question is in every single Warren Buffet book ever published! That's why he chuckled.
You should have asked us what question to ask him.
Yes, use low-cost index funds if you don't have time to do research… you can't take time out of your hectic 4-hour work week schedule to find time to invest?
Other advice from his books:
1) EVERYBODY can be an investor. Pick an industry, learn it VERY well, and only invest in what you know well. Buffet invests in boots, bricks, insurance, and food.
2) Get to know the management of a company before investing anything in it.
3) You can have a pretty diversified portfolio, even if you only own 10 stocks.
If I were you, I'd put the majority of that cash into something like a Vanguard index. Then pick some industry to learn well, network with the management of several companies, and invest in the ones that sound the most competent.
Keep an eye on those with a corporate culture of training and retaining talent: recruiting is a sign of a poorly run company.
Avoid like the plague any company that did a "cost cutting initiative." As Buffet says, no good businessman should suddenly decide to cut costs, any more than he should suddenly decide to start breathing!
Don't waste your time. Warren gave the right answer.
Here's what you do:
1. Dump it into a Vanguard index fund. With a million bucks, you qualify for their Flagship services (even fewer fees than Vanguard normally charges).
2. Go dancing or whatever you're into these days.
How would you answer my question?
"If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage."
1. I would take 90% of my investable assets and lock them up in safe, low-risk investments with the objective of earning 8%-10% per year. (This could be easily Outsourced to the right people)
2. Take the remaining 10% and Outsource to a company that uses computer Automation to Swing Trade the S&P eMini Futures. Average return is about 6.9% a Month…
And there you have it…the secret to the man's success. He invests in what he know, and he invests through an easily repeatable vehicle without fail. While I'd like to be a stock-picking mogul, I simply don't have the time for the required research. Buffett's answer if perfect for people like me because I can invest it and forget – and then get on with life. Now, if I just had a million to invest!
Unreal story! You gave me a $10,000+ life experience through this posting. Thanks so much for sharing this with us!
For someone so risk seeking in your personal life, I'm surprised at your risk tolerance rate of 10%. From reading your blog, it seems like you live your life experiences with a 50% risk tolerance rate.
Re: the vote
Depends on why you invested in the business in the first place. If you were speculating then probably only 5% is enough to make you jump ship but if you bought because you saw long-term growth then have faith in why you originally bought in.
Apple is a good example. Beginning of the year they topped $200/share. A month or 2 later and it bottomed at $119/share. Today…its back up to $185/share and I personally believe they'll be mid $200 a year from now.
you spelled volatility wrong in the survey
Doh! Thanks for catching the typo. Fixed. -T
In the same way Tim has helped us all break free of the adage "you'll be broke unless you work a good job 40 hours per week for 40 years"… I work to help people break free of the adage you just quoted.
To clarify, when I say private investments, I'm talking more about financial instruments and assets that have predictable income so that you know you are making x% per year and there's no need to try to buy and sell at a right price. These can often be 12% – 25% annualized… I'm not talking about speculative, risky private placements. No need for valuations or qualified buyers. Just a simple asset a la the Kiyosaki definition: something that regularly brings income. I've helped hundreds of people do this over the past 6 years.
Great read! I interviewed the author of that book, John Rubino, on my internet radio show last month. I respect him a lot because he accurately predicted the outcome of the housing bubble to a "T" back in 2003. He knows his stuff, and you can't build wealth investing in any market if you don't understand what's happening to the money being used (i.e. inflation / currency debasement). -
And, Tim, the answer to the question in your post:
Firstly, I would learn to read and understand financial statements. This won't take a lot of time. Then…
20% precious metals (gold/silver/platinum)
40% Cash flow real estate with at least 15%+ annual ROI – preferably apartment buildings in central areas of a a major city. Hard times bring people out of their large houses in the suburbs and into apartments/condos closer to their work ( $4 gas :-O )… Find one with 15%+ annualized ROI, and keep it forever.
10% Debt instruments for equipment – such as lease financing for electric cars & solar panels
10% Misc debt instruments – such as private mortgage notes at a low LTV (low risk), these are abundant right now.
20% HIGH RISK investments – such as the pre-IPOs and/or private placements you now have access to since you're a quasi-celebrity and an "accredited investor" by nature of your net worth. There's no shortage of high risk investments, be creative. Don't put more than 5% to 10% of your portfolio in any single high risk investment.
So the gold is a good hedge against hyperinflation, silver has good upside because its used in most electronic equipment and the Indian and Chinese people who are getting jobs will be buying PCs/ipods/etc, cash flow real estate should speak for itself (no speculation or perfect timing required), equipment debt instruments is a good way to lock in a return from the growth of alternative energy, the state of the mortgage market leaves plenty of opportunity to write or buy private mortgage notes, and high risk investments are fun, exciting, and sometimes pay off massively.
The key difference with my plan is that it is not based on "beating the market", timing anything perfectly, or surrendering my money to other people for them to invest it outside of my understanding. My plan is based on understanding financial statements and investing for income… basically a guaranteed return.
Each year the World Wealth Report is published showing that the world's wealthiest people hold about around 50% of their wealth in real estate and/or alternative assets. This figure is even understated because it is based on a survey of Merrill Lynch clients.
Any investment plan that puts more than 50% into public securities markets is one that runs contrary to what real wealthy people actually do.
p.s. If this 30 year old guy (from your question) traveled internationally as much as you do, he'd literally open a world of possibilities. Once he understands financial statements, debt instruments, and cash flow real estate, he'd find opportunities even more abundant outside of the U.S.
I don't usually like to comment unless I feel like I have something of substance to say, but man – this is awesome! You spoke to Warren Buffett! Your life experiences are seriously unbelievable…
I have no undergrad degree so I can't go to school for the three things buffett mentioned:
How to Value a Business
How to Think about Market Fluctuation
How to Communicate WellAnyone have any suggestions for studying these three topics without an MBA program?
How would I invest 1 million, given that I have 18 months living expenses already taken care of?
I'd immediately hire a (cheap but competent) market research company to test out 3-5 ideas I have for small businesses. Whichever one they came back and said would be more likely to be successful I'd spend the remaining hundreds of thousands building.
Any of the ideas I had them test would, of course, be easily autopiloted. No reason to make myself work more.
Investing, to me, seems like giving away your money, crossing your fingers, and hoping the market obeys your better interests. I'd rather have that money building something tangible that I can direct and control. If it fails, it fails for a reason, rather than some random fluctuation.
As I mentioned in an earlier comment, the book "The Richest Man in Babylon" takes a similar approach to investing as Buffett. Earlier I mentioned the book, but since it appears you're looking for a specific answer, I'll give you mine which will be based substantially on the book I mentioned. What industries do you understand? What industries do you have an interest in that you could research and comprehend? Focus on one or two industries and find companies being run by someone with successful experience in that industry; invest in those few companies as directly as you can. Don't take your money out. Personally, I would also put some money – perhaps 15-20% – into metals, particularly silver at the moment, but also buy gold on a "dip". Industries I'd buy into? Renewable energy like solar and wind. Vertical axis windmills are looking promising to me. Larger real estate development companies with experience in urban development/re-development are probably a good long-term bet with higher gas prices, and they might be a bargain right now. Whatever you do, buy for the long term.
I am going to make a few assumptions here:
1. You are an accredited investor.
2. Your businesses will continue to run themselves and create cash flow income for you.
3. This $1 million is true risk capital.That being said, I am a investment advisor. I create portfolios for clients in both traditional asset classes (stocks, bonds, cash, and real estate) and non-traditional asset classes (raw materials, energy, metals, and currencies). This provides a mix of investments that are uncorrelated to one another.
Without getting into specific investment vehicles, an asset allocation will look something like this:
US Equities – 24.5%
International Equities – 19.5%
Real Estate – 3%
Raw Materials – 12%
Energy – 12.5%
Metals – 12%
Currencies – 6%
Cash – 10.5%The goal is to produce an absolute return. For my clients, I am not interested in having the following conversation, "The market was down 40% this year, Mr. Jones, but we only lost 18%. We did a great job!" No. A loss is a loss. By setting up a portfolio for absolute return, not relative returns, your chances of forwarding the ball every year is much greater.
Remember, a 50% loss requires a 100% gain to get back to even. Don't lose.
Patrick Clark
Well simple advice invest in Visa ( V ) , just look at the 300% mastercard made.
@ Allison:
"If you ever make it to AZ in the wintertime, feel free to drop me a line and I will take you to the track, my treat."If Tim were TRULY adventurous he'd come out here in June and July….only tourists come here in winter.
@ Everyone asking "what courses can I take"….for communications, it is my opinion that most folks do OK in verbal communications, but fail miserably in written communications. To that end, I suggest:
"On Writing Well" by William K. Zissner
"The Elements of Style" by Strunk and WhiteIf you can digest and, more importantly, apply these books, your written communication skills will improve dramatically. Both are available at Amazon.com or your typical chain bookstore, but you can likely find them in second-hand bookstores at a fraction of the price, or borrow them from your local library.
The other two topics are out of my lane.
Phoenix -
@Dave – Great points.
@Patrick – You're one of the scarce few investment advisors I've seen that readily admits that mathematically hitting a target return requires ridiculously large gains to get back on track from losses. Kudos to you
@Russ and others — for the best, 4HWW-esque way to achieve mean variance optimized portfolios with lowest investment costs and purest index funds (read: DFA > Vanguard) check out AssetBuilder.com. You could beat 80-90% of professional money managers in 15 minutes a year via one of their portfolios.
I may not be Buffet, but with a $million, invest in commercial Real Estate. More money is made and held in RE than all other investment classes combined. Fantastic tax benefits, monthly cashflow to live on and continued appreciation(don't listen to the news, many RE assett classes are still appreciating). Combine that with 1031 exchanges and you can leapfrog your wealth every few years.
Apartment buildings and self storage units in growing areas would be my choice. Areas like South East Texas, Louisville KY, Alabama, Arkansas. Many of these areas have stable/growing populations and Real Estate prices haven't inflated beyond their value as in California and much of the Coastal areas. It is not uncommon to get a 14% Cash on Cash return within the 1st year. On top of that, you can use a value-add strategy to force appreciation (improving the building, raising rents, back charging utilities etc..) this makes your CAP rates and value higher with the stroke of a pen.
Look into it,
Nice blog, Nate
You hit it on the head about apartment building in city centers. People ask me if my RE business is hurting because of the housing slump. I just laugh and tell them that all my rents went up and my cashflow has never been better!Seriously Tim, when are you going to blog something about commercial RE? People have been living the 4-hour work week on RE cashflows since the beginning of time, wouldn't you agree?
Hey Tim, didn't see you there … but, Warren was kind enough to invite 'international visitors' (which I qualified for even though I live in the US … nice, huh?) to get a t-shirt signed. He was exhausted by the time I got to him, though.
Heard your question but already knew that he would sidestep MOST of your question. His Index Fund advice is fine for the novice, but if you are going to become rich – well, not you & I exactly, others – then you need to cast your investing net wider:
individual stocks; RE; businesses; etc. and you are going to need to apply some leverage (money, time, and knowledge/talent) …
… but, with multiple streams of income, you know this already AJC.
Nice post Tim.
I really liked the approach on non-profits and CEO compensation. Buffet is one heck of a guy, it seems like he just uses common sense, which some investors just forget about.
Heres a post in response to your question and Buffet's predictions about the recession, it especially relates to "what we should be investing in today".
How would I answer your question? Automation.
Gather enormous amounts of data, it is easy enough to do with any OTS software. Then create a simple algorithm ("filter" is a less intimidating word) to extract gains. You will not predict the stock market, but can achieve positive gains 60% of the time (i am around 65%). Might not sound impressive, but trading often will make it compound.
The beautiful part? Once the "filter" is set up, all you need to do is put in orders every night. I am a mechanical engineer with a demanding job at a product design consultancy, and I am up 67.7% since Jan 22… and its all automated.
Check me out @ Zecco… my sn is Markethack
[...] to attend the Berkshire Hathaway annual shareholder meeting. Through clever planning he was able to pick Warren Buffett's brain. Here's the question he asked: If you were 30 years old and had no dependents but a full-time [...]
ok, I would say not a normal day!
So what's in store for the future? Trip to the moon anytime soon? -
@Nate, I blogged about forced appreciation in commercial RE on April 28th – FYI.
I think the difference between stories of real estate riches and stories of winning stock market strategies is that the RE stories are abundant. Meet 100 real-world millionaires and most of them made it in RE or business, and all of them keep growing a substantial portion of it in RE.
Stock market strategy stories tend to be theoretical examples that haven't played out yet, stories of savings (rather than investment returns), stories of short term winnings (almost like "I can beat the craps table"), or stories of massive success like Warren Buffett that are difficult to replicate.
Many people discard RE success stories because they group RE investors with the people who flipped houses during the housing bubble. Those weren't RE investors, they were same people who jumped into the DOT COM crash of 2000. As the dust has settled, many of the world's wealthiest people are avid RE investors… as it always has been and always will be.
My answer to your question:
It seems like a BS question. If you have a million by the time you are 30, you are very close to being set for life. Work until you make it 2 million, then even at a measly 6% gain, you can live comfortable at $120k /year for life, not touching the principal. Or, you could continue to work and save and sweeten the deal even more (depending on how much it takes to make you comfortable).
It seems like a waste of time question that Warren saw right through and gave you a waste of time (Albeit very insightful and very correct) answer.
Hi Josh,
I can see where you're coming from, but please realize that the question never focused on the income derived from the investment.
No matter how much money I or anyone else has, I think economic resources should be put in areas of high yield rather than low yield for positive contribution (choosing sectors, economies, markets with a moral compass).
Putting cash in the bank might be safe, and preserving capital is often the first priority, but all things equal, I think putting capital to work in positive ways — while hedging risk — is almost a moral obligation.
Hope that helps,
You've asked a question that will give you an infinite variety of answers, even from the Oracle of Omaha.
Find an investment style that fits your personality, then backtest that strategy over long & varied starting/ending periods to see if you can stomach the maximum drop ("drawdown"). And stick with it…forever. No one can predict the market, you never know if you're about to buy before a big dip.
It's true that growth stocks outperform a helluvalot of other asset classes over the long haul.
But, someone who put all their money in the S&P500 index on 1/3/2000 lost about -50% (by October 2002) and is still losing money eight years later! Most might throw in the towel at that low point, when they should have been adding. The pain of losing is alot stronger than the hope of winning.
It's subjective, but maybe the best time to start that type of strategy is when the markets are overwhelmed with bad news, fear & loathing? Or add a little bit at a time? (Dollar cost averaging).
A good place to start could be reading the chapter on Mutual Funds in O'Neil's "How To Make Money In Stocks". Good luck!
From Lawrence in "Office Space":
Lawrence: I'll tell you what I'd do, man, two chicks at the same time, man. -
EXCELENTE POST… ¿Para cuándo el T4HW en castellano? Espero que lo presentes en Buenos Aires!!!! Estás invitado a una recorrdia por las mejores parrillas del paseo Dardo Rocha, en San Isidro…
con toda mi admiración, desde Argentina
You should invest it in real estate. The S&P is not a bad option, it will give you about 11% per year as long as you can hold it five years or more (there is some volatility). But investing a million dollars in real estate can give you a REALIZED monthly income of $10,000 in less than a year. And you don't have to do it yourself, you can invest passively through partnerships with lead investors. Thats $10,000 actual cash you can spend while still building equity, appreciation, great tax benefits, etc in the property. Stock market can't touch that.
Finally someone said it! This is exactly what I would do. I would then take the $10,000 per month cashflow and put it into covered calls at anywhere between 2-4% per month upfront cash flow again. You could then use that cash to buy more properties.
Nothing to do with Warren Buffet or investing, just wanted to say that I like your new photos. The one where you're standing on your head, arms out to your sides, makes me smile. (Needed a smile today, got it, thanks!)
ditto what Marvin said – beautiful new photos, kudos to your photographer (of course he had a great subject )
To add to my post.
Most of the stock investments that are being proposed in this thread are "invest in index funds" "the majority of mutual funds do not beat the market!" Well, while that may be true, with $1 million, an investor can afford private managers to manage the money through separately managed or unified managed accounts, where there are many managers that beat the market on a consistent basis on a net basis. Any advisor who simply puts someone in index funds is just plain lazy.
The 4-Hour Work Week is about outsourcing work to those who can do the work competently. Does an advocate of the 4-Hour Work Week want to sit in front of the computer pouring over stocks and mutual funds? No. Rather pay a competent advisor/manager. Investments can be monitored on a regular basis via email communication, phone conversation, and quarterly investment meetings. Essentially hiring a Chief Investment Officer (CIO).
Oh, and yes, part of the $1 million should be put in direct real estate investments such as residential and commerical via syndicate deals. REITs take away too many of the tax and leverage advantages of real estate.
To Your Investment Success,
Patrick Clark
email@example.com -
Your allocation should be approximately as follows:
10% Call options on the S&P500This means you'll lose almost nothing if the market tanks but you'll still get a lot of the return of the S&P500 on the upside.
[...] morning I found a great blog where the blogger had the opportunity to ask a question to Warren Buffett at its annual Berkshire [...]
Oliver, what method do you recommend to impliment the 90/10 investment (tips and call options) and is there a site that shows historic returns?
[...] Berkshire Hathaway. La pregunta la realizó un blogger, Tim Ferris, que asistió a la Junta, y lo explica en su blog. Os traduzco la pregunta y la respuesta dada por Buffet: "Buenas tardes Sr. Buffet y [...]
Hey Tim, I was at the meeting as well and I remember that question, I thought it was a good one.
But I would suggest not listening to any of these guys here, like Warren Buffett said when he answered your question, "don't listen to people who benefit from your decisions." He said it differently but that was the jist.
Buffett doesn't listen to brokers, or financial advisors. Be an independent thinker. Learn from the best and only the best, and apply it. Keep going to the meetings and be an independent thinker and you will succeed.
Good Luck,
Last week I attended a lecture by Nobel Price Professor William F. Sharpe on capital markets in Madrid.
I asked the same question that you did, and he gave me the same answer that WB didI recommend his book on this topic:
Investors and Markets: Portfolio Choices, Asset Prices, and Investment AdviceBuen día,
Luis -
Definitely not a waste of time question. Substitute age 30 with age 65 and Warren's answer would've been the same.
Think about this…
Beside it being highly out of his character, why did Warren not say "put it all in Berkshire Hathaway stock"? Even despite the fact we know that this is one strategy for the "know nothing" investor to outperform the market over the long-term?
My interpretation of "put it all in a low-cost index fund" is as much a philosophical one as it is a practical one. As a "know nothing" investor, you add no value to the system, and so there is no reason why you should expect to outperform the market. This is Warren's rebuttal of the "something for nothing" argument if you will…
He then dangles a big fat carrot in front of you: "There are situations, for the full-time investor, where it'd be a mistake not to invest 50% of your net worth in one business."
What "situations"?
IOW, if you want to know how to outperform the market, go find out. Add value to the system. Do the research. Learn how to value a business. Learn how to think about market fluctuations. Learn how to communicate well. Read "The Intelligent Investor". Become a "know something" investor.
Thanks for offering that book for free. I prefer reading things in paper-form and certainly people could also check "The Richest Man in Babylon" out from a library rather than buying it. Your site does look interesting. I would argue that using predefined allocations for assets is not the best way to handle investing. Each person's goals are different, and I also think that what made sense in 1985, 1995, or 2005 doesn't necessarily make sense now. Investing in Microsoft in 1985 might have made a lot of sense; there was plenty of growth opportunity and you could buy into the company at a very small price. The same applies to General Electric or Proctor & Gamble. They made sense once, and if you'd bought early-on they would be great to own now (dividends, etc.), but it makes no sense to jump in now. The same applies to asset classes. Each point in history is different. Each person is at a different point in life. I believe the principles in "The Richest Man in Babylon" are sound, and that the lack of recommendation of any specific allocation makes it more timeless. -
Last year I earned a 115% return.
The year before about the same.
In the last 5 years I have never had returns below 40%.
At 38 I have been retired for 7 years and haven't bought a single stock in about 20 years. And never will.This is how I grew about 100K into several million sitting mostly at home:
1. Find booming city.
2. Buy property just outside it (avoiding foreclosures, DIYs, and renting out: all compromise 4HWW)
3. Wait 1 to 3 years.
4. Sell.
5. Go to step 1.Previous winners: New Jersey (next to Manhattan), Toronto, Amman, Dubai.
Future winners: Eastern Europe (esp. Bulgaria), Malaysia, Qatar, and, of course, Dubai.
Great post Tim,
Even though I am behind in my personal investment strategies due to poor choices and life challenges I know that Mr. Buffett's sage advice makes sense and will take the advice and put it to action when able.
I think my personal moral obligation is to earn income at level that lets me live a lifestyle congruent to how I want my present and future to look like. Example: a family, lots of travel and learning, and freedom to be with the people I love and add contribution with more time and resources to help others in my own special way.
I read a great book called "All Your Worth" that doesn't speak of investments purse. It's for the set of people like me who are still learning how to spend wisely. Most people in credit burdened America don't have a spending plan. I know you speak of how to spend in your own way in your book by focusing on your dreams and making choices that help facilitate say a trip to Costa Rica or Argentina.
"All Your Worth" preaches spending your income in these ways:
50% Must have expenses. (home, transportation utilities, some food)
30% Spending on what ever you want. (some food, clothes, coffee or tea)
20% Savings (debt payments, retirement, investments)Learning how to manage the money coming in, learning how to spend and invest are all important tools to living the lifestyle you want thanks again Tim for reminding us.
Keep-em coming!
Jen -
Question: How would you invest your first million dollars?
A: I would invest, $100k – $200k in 5 -10 online startup businesses. All businesses run by young inspired entrepreneurs that I trust.
Regarding yr qn:
"If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage."
A general line of approach may be:1) Invest in nothing for first six months. Just read up on the investment books, from the basics to the advanced kind (i.e. options/CFD trading/real estate etc). Read up on the best investors/traders.
2) Decide on a few suitable investing/trading methods and start testing using the first 100K for the next 6-12 months. During this period, decide whether which asset/method is most appropriate for you, in terms of psychology, charactor and knowledge.
3) Once you find your most suitable method, you can start to commit the rest of the cash to the chosen investment method. For some, the most suitable method may include passive investing and/or find work in vocations that you like.
Personally, if your given scenario happens, I would commit 90% to equities (active investing) and 10% to cash (for unforseen accidents or investment opportunities). And if I am unemployed, I may find a job in my desired line of work if I find jobless life too boring.
tim, tim, tim! what would you do if you were 25 year old with no dependents, a full time job, didnt want to pay advisor commisions for the next 50 years, how would you invest your first $AUD 125,000. Ps i want to double my money asap so i can go build a house in prague, with my 30 yr old missus.
Try investing in Visa, they are on track to what mastercard did…. Also, you can try investing in companies that pay high dividend yields, ie GE & BAC.
I Plan on buying Stocks in China companies as their economy is growing rapidly
Tim and All-
I have been a student of Buffet and Munger for years. I'm going to offer you all some of the greatest life hacks for free…1. Do exactly what they suggest and do not be tricked into deviating from their financial advice. Do not overthink their words. They are simple to understand and meant to be so. Do not listen to "interpretations" by people trying to sell you on their services or method guaranteeing "better returns".
2. Read "Poor Charlie's Almanack".
3. Figure out what you would do for free early, and try to spend your life doing that.
Pura Vida,
To William Beavers,
WB charged a percentage of the return that he achieved over the "risk free rate of return" (10 yr treasury). If he didn't beat it…He got nothing. There was no percentage on assets…
Excellent story and congratulations on getting the chance to talk with ( i guess more at a legend. I wanted to drive home the 2 points that were made so simply by WB:
1) Put your 1$M USD into a smartly selected index fund and let it grow over time.
2) KEEP doing what you are doing; work to get more money.
No one in these posts have referenced item number TWO – In my opinion this was the key component to WB's advice – If you made $1M USD after tax cash by the age 30 then why would you bet on anything other than what you had been doing in the past to generate more money? Follow what you know works for you to make more money AND invest your extra cash into solid performing known index funds and you will always come out ahead.
If you look at WB and the portfolio companies he adds to BH, this simple concept in his advice has served him well.
@Paul C – nice post.
Just my .02
I would invest in an under-performing commercial real estate property (a business).
WIth the right type of project you should be able to make routinely 25% to 40% return on your investment and create powerful streams of income.
1. Leverage, 1 M (down payment) will buy you at least 5 Million in assets (you can't do that with securities)
OR buy with all cash, for a significant discount on the property.
2. Forced Appreciation, With basic improvements and briging in new tenancts (done by brokers or property managers) you control the increase in value of your investment (you don't have this control in the stock market)
3. The asset while more time intensive than securities, is managed by professionals and requires and generates stable streams of monthly income.
4. Tax advantages of retal income and depreciation of the property. These items reduce and defer tax liability.
5. Insurance. Even if the business burns up your ivestment dollars are covered. (not a chance that you can insure your S&P 500 index funds agains loss)
I focused on 'no load' and came up with this get rich slow mix:
70% in DRiP stocks (http://en.wikipedia.org/wiki/Dividend_reinvestment_program)
I like these:
AFL20% in no load index fund — Tax Free Bond Funds
VWITX or
VWLTX10% money market (liquid)
Spread it around accounts but deposit enough to avoid fees:
(nice lists of funds, a bit dated however)
http://www.fundadvice.com/explode.html#HerePlease contact me if interested in how I came up with these.
we can't follow Buffet's advices, he plays in a different league. He doesn't buy stocks, he buys the whole company. To buy an index fund (etf) and forget? impossible for we little guy if you don't have a risk management system and entry-exit rules that proved to work in the last 20 years. otherwise fear and greed , investor's worst enemies, will destroy you as you see 30% of your investments wiped off in the next bear market. Protect your investment, you must do that, your broker won't, it's not his job. cash IS an asset during bear market.
eliminate the middle man..that's why I love IFs and WBs advice. Anyone know the safest way to invest US$ on international trading floors other than iShares? Good god Brazil's been doing great (EWZ)..I predict Argentina will be next..one word my commodity-loving friends: soybeans
Tim you're the greatest thing since Rita G.
To Paul C..
Thanks for the clarification on the asset mgmt fee..
I knew there was something that I forgot..
I hope everyone has looked at VISA, I am no stock expert but I know a good stock when I see it. They have no real debt and are very comparable to MA_ Mastercard.
Jose Castro-Frenzel
This is a trick question.
If I had a million dollars to invest I wouldn't need a full time job and I could then spend my time focused on investing. Heck with a return 2-5 % above inflation one can travel the world and live like a king. If this is the case anything from CDs to index funds, preferably allocated in strong currencies, will do.
Hey Tim, I just finished reading your book today and it's awesome! As far as how I would invest my first $1mil
I would invest 80% in stocks (this includes options), short term and intermediate bonds borrow against the interest on the bonds once matured, FX (Foreign Exchange), precious metals (i.e. invest in gold, silver, platinum and palladium) as a financial hedge, open an SEP or a 401(b) if owing a small business.
of the 80% this would be my breakdown:
5% in stocks, bonds and fx
15% in metals
10% in futures
15% in SEP or 401(b)
20% in RE (Real Estate, raw land or flipping)10% in to a Vanguard CRT (Charitable Remainder Trust) (min. 100/mo to charities that are listed on their page to a max. of $500/mo last time I talked to Vanguard )
Remaining 10% I would spend traveling, skydiving, and playing volleyball (and hopefully play on the Association of Volleyball Professionals (AVP)) with a nick name of "Mini-me" since most of the guys avg. about 6'2." (I'm 5'9″)
Dump VISA.
I am selling all my VISA stock. Go with something that will last!
Hello Tim,
My wife sent to me this link, and when I read what Mr. Buffett has to say to achieve success If you have money to invest and a job. It was clear to me that my own ideas and strategies are not far off from achieving success.
I'm developing a company that basically is what Mr.Buffett's strategy its all about, and while he mentions to put everything on S&P 500 I have a strategy that changes accordingly to different markets. It might sound like a hedge fund but is actually an anti-hedge fund.I believe the strategy is sound and now that I know that Warren Buffett endorses such a idea I'm more excited to start my strategy.
Generic advice. I came here today to ask Tim what has changed about the 4HWW now that the dollar is in decline? How does it affect the you? Now, EU people are buying up the US.
As for investments, the same is true. The growth opportunities are not US-based. Any investor should be looking in foreign markets, like India, Latin America and to some degree China (but China is riskier. The current inflation is done to hurt the Chinese. If successful, investments there will not work out) less but Buffet et al cannot suggest that because it would come at a price – money reinvested out of the US market into foreign markets would drop the DJIA and NASDAQ, and ruin their current investments.
I won't want to be an alarmist, but the US in in decline. Or not so much of a decline, as other countries once inferior are now gaining on us. I'd look to them for real growth potential.
[...] I teach. It was simplicity itself: contact three seemingly impossible-to-reach people—J Lo., Warren Buffett, Bill Clinton, J.D. Salinger, I don't care—and get at least one to reply to three [...]
If you know you love a certain company and can stomach the lack of diversity there are great chances for big gains (or losses). If you have less risk tolerance go for the diversification of the index funds. Years ago people said Apple was something to get rid of. I loved my Newton. One of the rubber feet fell off and I called to see what it would cost me to replace the little peel and stick rubber thing. Apple overnighted new rubber feet for my Newton – without me asking them to, and gave me the little replacement feet for free.. Great service and great products. I bought some stock. About 14 per share at the time. Steve Jobs decided to kill the Newton. Bill Gates invested some Microsoft $$$ in Apple. Stock went way up and has been up ever since. I have a number of mutual funds and dabble in individual stocks. It works for me.
With as passionate you are about learning ANYTHING that interests you (I've watched your videos and I still can't figure out how to spin a Bic pen) I would think you would dive into finding a way to utilize the stock market to grow your money. There are an infinite amount of ways to pull money out of the market that require very little time and effort. And best of all, it is challenging and FUN!
I cringe whenever I hear Buffet suggest index funds. For those who don't know anything about the market and don't WANT to know anything, sure they are the best options. But for somebody who sees growing their money as a game and as a challenge, there is nothing like managing your money yourself.
I would suggest you find a mechanical system of trading that works for you. You can spend 20 minutes a week having a computer pick the best stocks of the moment, hold them for a week, and run your list again the next week (or month). The American Association of Individual Investors compiles a list of several stock "screens" that handily beat any index funds over 10 years. The Zweig screen alone has averaged nearly 40% a year for the last 10 years. That's a nifty income on a million bucks.
Once you find a system that fits your style, you can do further research or learning if you want. The Internet has put trading and investing into the hands of everyone and we no longer need to allow brokers and professional traders to have all the fun!
Off-topic: Could you please consider making the post date more visible by size or position in the design of the blog? Thanks for listening /David!
A lot of similar Buffett wisdom can be had in The Warren Buffett Way.
Tim.. some badass is posting 'bad thing' about you
Hi Henry,
Not to worry and thanks for the heads up, but it's no problem. The book polarizes people and some like to attack others on their blogs to try and drive traffic. I just ignore them.
All the best,
The essence of your piece is education and I believe that will be Buffett's greatest legacy. But do not ignore the work of his business partner – Charlie Munger. I and quite a few others are great followers of his 'mental models' thinking approach. It's not for everyone, but I think anyone planning on investing has to be aware of the big ideas, at the very least.
I've included the link on this post and hope people will find it useful.
Best wishes – Dean
"Each year the World Wealth Report is published showing that the world's wealthiest people hold about around 50% of their wealth in real estate and/or alternative assets."Your case is, boldy put: the rich have 50%+ in real estate, so it must be intelligent. I don't buy the idea but even if:
I checked the world wealth record 2007. On page 15 you can see your asumption crumble: They only hold 16-20% depending the year (2004-2008). Although you provided the reasons for your suggestion — that distiguishes you from the rest –, I can not follow your argument we should hold 40% real estate assets instead of ETF etc. Can you clarify that?
You are the one constantly preaching about not needing very much money to live the lifestyle that you do, with a million dollars all in bonds with a 7% annual ROI you are still making $70,000/yr playing it as safe as possible when it comes to monetary investments with all of your time (a much more precious commodity) free for investing how you see fit. You would need to adjust for inflation but it is still quite enough money to spend all of your time traveling, doing volunteer work, kickboxing, tango dancing, enjoying fine wines and chocolates, testing out cars, giving countless interviews, writing for your blog, finally coming up with some new hobbies, or heck maybe even writing another book. But if playing it safe isn't for you then you are more than welcome to give me the million dollars and I would be more than happy to party it up in the previously described manner!
Great post. Always interesting to see the buzz that occurs around anything involving the name Warren Buffet.
Warren Buffet is a guru when it comes to money. Those who invested in his ideas early are now rich.
[...] talking about romantic partnerships, but contacting someone you admire and want the attention of (Tim Ferriss describes this as a Mentor-type process) — we're all [...]
…but there is no Chapter 20 in the Intelligent Investor…?
There is a great show from PBS called "Buffett & Gates Go Back to School"
In it they share their thoughts on a number of topics including wealth creation, standing out in the business world and what it means to be *truly* wealthy.
It's also interesting because it was recorded 3 years ago and much of what they said has played out (i.e. Gates is now more active in his philanthropy foundation and has stepped back in his role within Microsoft).
PBS actually has a number of great speials on Warren Buffet, maybe because he tends to be a big supporter of public television.
P.S. No, I do not work for PBS! -
[...] – bookmarked by 1 members originally found by terronk on 2008-07-22 Picking Warren Buffett's Brain: Notes from a Novice [...]
In answer to your question, I think if I was 30 with no dependents, I would spend a few months studying a group of stocks and invest in a few (3-5) that projected large EPS gains over the next 5 years that also had low current P/E ratios. I think 30 is too early to be overly cautious if you have funds that you can be a bit risky with.
Excellent post, Tim. Thank you. Attending a Berkshire shareholder's meeting in the next few years is a life goal of mine.
I have a slightly unrelated question I would like to pose to the readers of this thread (if this is not an appropriate topic then I apologize). This popped in my mind while reading how Tim raced to be one of those at a microphone who could ask a question of the Oracle, and it relates to the general 4HWW tenant of living a life full of excitement:
How do you get in to the front row at a major rock concert?
My favorite band ever, AC/DC, is beginning their world tour next month, and I plan to see at least three of their shows. I would love to get in to the front row of at least one, (there will likely be general admission floor seats), but I don't want to pay 5x face value from a ticket broker. Aside from camping out and being one of the first in through the door, are there any other good guidelines to follow?
[...] idea (think: 4-hr work week by Tim Ferriss who incidentally had a hilariously funny blog post on Warren Buffet) and for building market awareness, establishing thought leadership, and indirectly generating the [...]
Tim: I've met your blog thanks to this post found via [the link in my name]. Great blog.
Matt: in the 4th Spanish edition that I have, chapter 20 is the last and it is about "The safety margin as a core part of the investment"
[...] I teach. It was simplicity itself: contact three seemingly impossible-to-reach people—J Lo., Warren Buffett, Bill Clinton, J.D. Salinger, I don't care—and get at least one to reply to three [...]
[...] first saw this presentation at an Entepreneurs' Organization (EO) event in Omaha prior to my successful Warren Buffett quest at the annual Berkshire Hathaway shareholders [...]
"(B) Chapters 8 and 20 in The Intelligent Investor. (M) Anything by Ben Franklin."
I am a bit confused. Did Tim mean "Ben Graham"?
[...] -Warren Buffett, the richest man in the world, and CFOs/financiers at Berkshire's portfolio companies -Chief economists at top investments banks -Dot-commers who have turned $40,000 into $2,000,000 in stocks using massive leverage -Conservative entrepreneurs (still self-made millionaires) with all-bond portfolios -Money managers of the ultra-rich and ridiculously famous -Ivy league professors who not only trade options exclusively but also bet up to $500,000 per night as no-limit hold 'em poker players. [...]
[...] Picking Warren Buffett's Brain: Notes from a Novice – The Blog of Author Tim Ferriss var disqus_url = 'http://danputt.com/2008/10/22/picking-warren-buffetts-brain-notes-from-a-novice-the-blog-of-author-tim-ferriss/ '; var disqus_title = 'Picking Warren Buffett's Brain: Notes from a Novice – The Blog of Author Tim Ferriss'; var disqus_message = 'Munger: "The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity." Buffett: "There are situations, for the full-time investor, where it'd be a mistake not to invest 50% of your net worth in one business."%0APicking Warren Buffett's Brain: Notes from a Novice – The Blog of Author Tim Ferriss%0A'; View the entire comment thread. Search [...]
under the "Best books to read for investing and life?" line, did (M) mean Ben Graham or is it really Ben Franklin?
thanks -
Munger said Ben Franklin. He's a big fan, as am I.
Hiya Tim! If I'm reading you correctly, and WB
1. The reasoning is, for the least amount of effort, and cost to you, over 30 years and even less time, the ease of access and history of the US stock market is hard to beat. It wins against most things for a 10 to 20 year period as well. (Need money, try to sell a house now! vs. please sell enough to give me X dollars.)
2. Your effort to manage the money is ZERO, after you put the million in.
Think about that! — How many activities don't require you to do anything? And actually have a track record of earning money?
(I'm trying to promote my music, and yeap, it's work, ditto a book or any job. Being a landlord? REITs are far less work….)
He's offering you a great return with no work — but with RISK.
2.a. Risk, will my life continue if I lose it all. Will I need the money back before it makes more money, at least enough to beat INFLATION. You are a go getter, so why be fearful about things? Dude, let's face it, doing something on an adventure is far more likely to happen to you than going quietly into that good night.
b. Reward? Pays between 9% to 12% on average per year. No effort on your part. Lot easier than witting and promoting a book3. 100% of your time is now freed up to make money other ways.
4. The index seems to beat MANY mutual funds, and many stocks, about 85% of the time, and keeps "self-correcting" by dropping losers, such as Enron, again, no effort. (I am sure later folks can find examples for this — but again, it's a zero effort to you.)
5. There are guys who can beat the market for a time… but only for a time. They charge more money to play, than Vanguard does, although Fidelity also has index funds, etc. at good rates. Vanguard's fees are hard to beat if you have $1000, $100,000, or the million.
5. Customer service, ease of use, and focus on the "small investor" Boogle, the founder of Vanguard, has opinions, and let's put it into perspective — a million is NOT by their standards, with at one point, 4 Trillion dollars under management, not a large account. However, I can speak from my own experience, Vanguard will provide wonderful customer service, spending 50 minutes last night with me, as we worked through some transactions, purchases, and exchanges.
6. WB takes risks, but in giving this advice, he's providing great advice that historically has held true– even with all our issues in the USA, we are more transparent about what our companies are doing than many other companies around the world. The US stock market represents international companies, as well as domestic ones. This is part of risk.
7. To put things into perspective further — how much did your plane flight, trip, and question cost? Vs. say, his book. $1000 vs. $25 — If you had invested the money this week, on some days, it would have earned 5%– and lost 5% the next day — we are in weird times… but it make a great intro to a blog post, to promote your book — you are clever, but too busy — still you get to deduct the trip on your taxes now, as a business expense, etc. your accounting friends, or your own thinking is clear enough — and you likely sold some books, made appearances
However, if the choice had simply been see speaker X, vs. stay home and invest… stay home, invest. Then…
8. Go on with life.
8.a Yes, there is a place for diversification, and I am, and you should be too But at the end of the day, age of the investor, and hopes of return, it's simple personal finance stuff that should be taught to everyone. It's blessed my life with the ability to pay for some key things, and not worry about the money future, even when the market is down. For most people, they don't have a million in one place, so their time frame, goals, etc. are different.
9. However, for you Tim, it's all one — your life is promoting your message = you message is your life — ditto Derek S. of Cdbaby…
for me, it's something like that, the message is about helping people
-by raising dogs for people in wheelchairs,
-adopting and raising kids from foster care,
-writing music for people who are dying from cancer, and need encouragement, etc.
-However, my motivation isn't pure profit. I have been blessed because being able to step back and look at other things, I feel less forced into riskier or greedy decisions.(Greed and Fear, my dad would say move us in investing… but there can be love and caring for others as well. And yes, humor, hopes, foolish and otherwise… and then looking at it as one of the only games in town….)
This last would bring out my chief question to you,
Tim, do you want to put your money in as a blind investment ?
You need to ask yourself, "I am interested in a return, I don't care about where the money goes– or you want to support some causes, even if it costs vs. the Index?"
I read some time ago about the the no pork/no usury Muslim Mutual funds have done pretty well vs. funds with lots of banks in them… they have oil as the basis, not credit… That was before the price of oil dropped dramatically….
But, overall, you might want to consider a fund with a focus on things you believe in…
But the final point of view I came to, was it was the money I'd take out of it, and how I'd use that money, defined my character, more than what exactly it was invested in… And that I would give now, not just when I die, to the various causes, schools, and people that meant the most to me.
Volunteering should be easy for some one working only 4 hours a week
I will, in the interest of full disclosure, mention I also have holdings in a mutual funds that "screens" out casinos, and some other morally questionable businesses — and interestingly enough, it's done better than the stock market index — some of these companies don't do well long term…. certainly not when people don't have money to gamble…
Social funds, may beat out the index, but generally have higher costs, and more risks… back to WB and Boogle…
…[sorry, comment rules!]…
Thanks for your interesting blog posting.
Hi Tim,
A few months back you mentioned, "choosing sectors, economies, markets with a moral compass… putting capital to work in positive ways — while hedging risk — is almost a moral obligation".
I was impressed by this stance and completely agree. The world economy and markets are suffering because of businesses and individuals run by greed. If I was opening a new account (I already have Vanguard), I would choose a mutual fund called Amana. Most people might never consider it, but Amana does not invest in liquor, pornography, gambling, or banks. These may all be booming businesses, but unfortunately just add to the detriment in our society.
[...] Warren Buffet aconseja como invertir tu primer millon de dolares Oct.27, 2008, en General Publicado por (jp) Fuente: fourhourworkweek.com [...]
[...] first saw this presentation at an Entepreneurs' Organization (EO) event in Omaha prior to my successful Warren Buffett quest at the annual Berkshire Hathaway shareholders [...]
[...] Start reading the blogs of successful people and subscribe to their advice, knowledge, and research. I recommend Tim Ferriss blog , author of "The Four Hour Work Week." Recently he has questioned Warren Buffet on what to invest in and added great notes from the Berkshire Hathaway annual shareholders meeting. Click here for Tim's notes. [...]
I would invest in optimizing your web businesses w/ respect to conversion rates, opt-ins, etc. Investing in your own business to optimize what is already successful almost always yields the highest returns year over year. I know you are more interested in free time than more money at this point, so the investment could come in the form of a firm to work on that for you on a results-only basis. $1million invested in reducing your business returns, tweeking adwords or upgrading your own marketing systems can easily yield a 30% return year after year is easier (lower risk) and more profitable than virtually any other type of investment.
[...] Picking Warren Buffett's Brain: Notes from a Novice – As some of you guys know I just love anything that has to do with the Oracle of Omaha. [...]
Hi Tim and others,
the reason he gave you this advice:
Buffett let out a small laugh and began. "I'd put it all in a low-cost index fund that tracks the S&P 500 and get back to work…"
is not that he doesn't like you, it's that you were part of the public that is not a sophisticated investor like he is.
Like most financial advisers nowadays talk about, save money and invest in mutual funds, he gave you the same advice.If you were more sophisticated you would have not asked that question in the first place, you would have asked a better question.
This is not to be negative towards your question all I'm saying is, this is the advice that is the best for the poor and middle class public these days.
Patrick, investor.
[...] this book?. The answer to this is very simple… I was reading some old blog post from the Four Hour Work Week and I came across one particular post where Timothy Ferriss raced for the opportunity to ask Warren [...]
The answer to the question of how a 30 year old should invest his or her first million really depends on what the aim is:
- Do you want security and a steadily growing net worth?
- Do you want asset protection and disposable cash flow?In my opinion the smart answer would to look for the prior for the first 10-15 years, and then shift increasingly to the latter in the subsequent 10.
If you agree with that view, then there are certain types of property classes you can hardly go wrong with, as long as you diversify across borders.
More precise, working class rental properties in countries that are not yet quite industrialised and that have a growing (young) population, will produce both, cash flow and capital growth.
The emotional reward of giving less fortunate people decent housing at affordable rates while making decent profits at the same time, is f.o.c.As the portfolio matures (ie. you get older) and you require more disposable cash flow, you start adding rentals in growth areas for the lower middle class, as well as commercial property in the same areas.
Throw in an occasional purchase of agricultural land (orchards, forests, etc.) in the same countries, and you should be set for a life in comfort, a few years after starting, because you never have to sweat stock market turbulences, wonder about the global recession, nor do you need to check if the millionnaire in your top of the line holiday rental had everything with Madoff.
Poor people also have much better payment morale, especially when it comes to their rent.
Robert. -
I was not surprised at the % of "volatility able" voters. However, I have experience: After 9/11, my 401K bled $700 per month while I was putting in $500. I had a "moderate risk" spread of stocks and bonds and whatever else. The seller/manager had promised "You'll at least get your investment back." Yeah, right. Not at this rate. After three months, I couldn't stand the bleeding and stood my ground to move out of stocks completely. He practically begged me to keep the stocks as part of my spread, but I refused. I have no idea what the percentage was, nor did I feel panicky — I just wasn't going to waste my money anymore. Bitte.
[...] Luckily, we can benefit from Tim Ferriss's experience. Tim had the rare opportunity to ask Warren Buffett this question in person. He recounted: "Good afternoon, Mr. Buffett and Mr. Munger…" my voice boomed out [...]
[...] and Suggested Posts: Picking Warren Buffett's Brain: Notes from a Novice Rethinking Investing – Part 1: Common-Sense Rules for Uncommon Times Rethinking Investing – Part 2: [...]
Are you still looking for the answer to how to invest your first mil?
I would put it in one basket and watch that basket very carefully…stay away from the stock market and currencies..the whole world has become Vegas…
The basket I suggest is – real estate…Real estate will always work against inflation(in the long term)..Governments have a habit of printing money every few years..(this year more than others)..
And of course, watch your expenses very, very carefully…
M: "The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity." B: "There are situations, for the full-time investor, where it'd be a mistake not to invest 50% of your net worth in one business." If more aggressive: small stocks and specialized bonds, but no currencies.
I read through the comments and realized very few people mentioned this part of the conversation. They are suggesting non-diversification isn't it? Then your $1 million ought to be put into say at most 5-8 specific businesses' stocks/bonds (which is what they are doing in Berkshire now – buying bonds/stocks of Goldman,GE,etc)? And not "10% in X sector, 20% in Y sector, etc..", unless if you know nothing
As soon as I read Buffet's response, I thought the old saying, there is nothing new under the sun. Buffet just rephrased a quote by Confuscious;
"Before enlightenment, chop wood, carry water. After enlightenment, chop wood, carry water."Which reminds me, I need to go chop wood and carry water, now.
Hi Tim,
I was actually at the AGM (as a student attendee) and remember hearing this question. Didn't realize it was YOU asking it. Great question, would have loved to meet up if I knew it was you. -
Tim et al… Read Phil Town's Rule #1 (as I'm sure you have)… then signup for Investools Investing Foundation Course by doing their online course material (8hrs) and then go to their 2 day workshop – don't sign up for the options and advanced classes unless you want to become an active trader – its a waste of time and money. Phil teaches you the 4 M's here and its based on Buffett's rule of "don't lose money"… http://www.philtown.com/phil_towns_blog/2006/02/the_four_ms_qui.html
The information I provided above is ideal for the beginning to novice investor – those that are in the industry will be the first to criticize. The industry folks will criticize because its not how they make money which is from the fees they charge by investing in Mutual Funds. Buffett knows this and it is why he says to invest in an S&P low fee index fund – Investools teaches you how to get in and how to get out and how to protect your money. Money Management is the key to success in investing and there is no formula.
I picked up your book because Phil Town's name is on the top – couldn't pass it up. I'm a 35 year old IBMer with all the desire in the world to break free. Hope to be next to you on another flight to Buenos Aires one day with a bottle of Malbec… All the best. Andrew
I would invest some portion of it to a index fund, in order to preserve capital in the long run and recieve modest growth. Maybe 10-20% of it.
The rest of it I would invest to small businesses with high growth potential. I would not do these investments simultanusly, but will be investing step by step. Before investements I would study the company and it's managers carefully and to some extent I would be participating in the management process. Actually I would prefer investing to the companies, where I know the managment personally. This kind of a strategy can be viewed as risky, but it will provide an opportunity for higher capital gains and what is more important for me, it will allow to aquire knowledge about investement and business development at the grass-root level. -
Hi Tim,
Let's start from this assumption: "Simplicity is the greatest sophistication" by Leonardo Da Vinci.
Hence, give a look to this simple but effective investment strategy at this website: http://www.dogsofthedow.com/
All the very best with your new book ( already bought the previous: very interesting, it broadens your mind!) and your life
I think if your strategy is solid – it doesn't matter which way the market moves.
If you do a buy/write (rent shares), with a stop loss at the price minus premium , your money a) spends less time in the market, b) your loss will be very minimal c) you get further potential for profit if the order is exercised d) (most importantly) this takes about half an hour a month.
I used to leverage my exposure out as far as the bank would let me – but I found that even though that strategy requires no more effort – it results in very little sleep. My maximum exposure is 50-50, no more. Anything else will have you freaking out.
An easy, time cheap way to make 30% -60% per year – but seldom more.
I don't know much, but I DO know that I hate pouring over the stock market for hours and hours. I know that I don't like depending on my feeble human emotion to make financial decisions – I'd rather have a plan that works regardless. The stock market will always be crazy – predicting where they are going takes too long.
I'd say just find a strategy that let's you live away from the stockmarket, sleep at night, and enjoy the rest of the world outside of finance.
There is a wealth of information in these notes. Thanks for sharing.
Hi Tim,
Again:let's start from this assumption: "Simplicity is the greatest sophistication" by Leonardo Da Vinci!!
Therefore, have a look at this other simple but effective investment strategy on this website: http://www.magicformulainvesting.com
The book that explains this simple but effective investment strategy is:
"The Little Book that Beats The Market"
by Joel Greenblatt, mutual fund manager and university professor.
All the very best with your new book and your life!!
Thanks. I can recommend The Snowball: Warren Buffet and the Business of Life. The book is a great glimpse into Buffet's life, for all its success and oddity. It is written very well, by an astute financial mind in Alice Schroeder, who had previously spent many years covering BRK. If you haven't read it and want a summary of the book, click the website provided in my comment entry – there's one there. All the best, and keep up the positive posting!
Chad -
Yes – follow the S&P 500. Probably the best advice Warren gives for free. But, look at the statistics – the 500 beats something like 85% – 90% of all managed funds – and does it cheaper than them as well!
Glad you got to ask him a question.
I think Warren's advice is great but has one flaw: It's totally US centric. The growth rate of India and China is likely to massively exceed the grows of the US over the next 20 years. Also Warren hardly ever recommends his own stock even though it's likely to do better than the index. Personally I'm putting 25% of my cash into Berkshire shares, around 50% into an Indian value investing hedge fund that has no fees for the first 6% of return per year (this is safer from a fee perspective than an index fund, but has the advantage of picking value stocks in a massively growing economy rather than just going with the US which is not as likely to grow so fast) and the other 25% in Internet business that I know something about.
Amazing that such a quick response from Warren Buffett gets so much analysis. But he's certainly proved his worth.
I agree with comments in here that real estate and international index funds should probably be added. This helps diversification (albeit introducing exchange rate risk) and with real estate you get the benefit of gearing without being marked to market each day.
Most people understand real estate better than they understand the stock market too! I think Warren also once said he'd never invest in what he didn't understand quickly.
I am a great admirer of Warren Buffet. He is someone so effective with this instructions, that can change perceptions of people altogether. Great Personality!
It's very generous of you to have done all this research and shared it.
My question for Buffett — if I do what you did (and you're selling me on the B.H. meeting) — would be:
"If Warren Buffett had never invested and never become a billionaire — who would you be and how would people think about you?"
I have a web site where I research stocks under five dollars. I am a astute value investor. I do not believe that warren buffett is the value investor he was years ago if he was he most certainly would have caught the spectacular comeback of ford motor. the stock was trading at just 1 dollar a share two years ago the shares trade at 16 dollars today and the company is well on its way to becoming the leading world automobile company. another example is apple computer the shares traded at just 5 dollars in 1998 today they trade at 340 dollars. he did not see this one either their are numerous other examples.
Superb post but I was wanting to know if you could write a litte more on this subject? I'd be very thankful if you could elaborate a little bit more. Thanks!
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I know I'm very late on this comment, but I decided to dig into the archives a little on the Blog, and thought I'd share what I'd do with the Million $. Mine is an extremely simple approach, but that's the whole point. If this precludes full-time investing and you don't have a lot of investment knowledge or time maybe, it doesn't really matter in this case. This would be a once-a-month transaction that would easily earn a monthly income enough for me personally to retire today and still have money left to continue to invest.
I'd take the $1,000,000 and use it to sell FRONT MONTH Cash Secured Puts or Covered Calls (depending on the market) on whichever of the 2 ETFs I liked better between SPY and EFA. This is the perfect time to give specific examples of today's numbers, since it would be exactly today that the previous month's options would expire. So if I were to be doing this, I could have either sold my options again today, or waited until the market opened again on Tuesday (Monday is President's day). Keep in mind, the main thing here is to stay at your cost basis or better in regard to the strike price you choose, which essentially uses that $1,000,000 and you live off the "interest". So, depending on how close to the At The Money option you wanted to be (risking only the chance of owning the ETF until you were called out eventually), here are the numbers for this month:
SPY – Aggressive (At The Money) $16,571 monthly gain
SPY – Conservative (2 steps out of the money) $11,544
EFA – Aggressive (At The Money) $19,980 monthly gain
EFA – Conservative (2 steps out of the money) $11,136So since I personally live a fairly modest lifestyle, and as you have already pointed out with several examples using geoarbitrage, this amount per month would easily be enough to live comfortably without working at all if you didn't want, while still having plenty left to re-invest or do with whatever you'd choose!
Thanks for the chance to answer,
Paul -
I'd buy some houses and rent them out, this would easily produce enough money to enjoy financial freedom.
i disagree! It will give you enough income to live on and become lazy and never progress, a mill of property doesn't give you that much income!
"I'd put it all in a low-cost index fund that tracks the S&P 500 and get back to work…" Warren Buffet:
There was a index mentioned hear right after this quote or within this quote when I checked it few weeks ago… is that index removed.. it was something like vn.. I do not remember and I cannot find this.
Does anyone know which index it was. It had 10% increase since start of this year.??? -
If you know stocks well, focus value/growth investing like Mr B says.
If not, indexes.For going down the route of choosing stocks ( which, alas, takes a significant amount of time), I recommend high ROCE companies with low debt, high margins- highest in the industry preferably, good management, a simple model (" that any idiot could run, as one day, one will" Peter Lynch), and a realistic model for growth. A good, clean past too. Any capitalisation, but I personally prefer £200M+ as then they don't need to split or add shares to fund growth ( how annoying is that when that happens!). A wide moat is a big bonus.
An enterprising investor (many value investors do not buy into cyclicals) might also consider a percentage in cyclicals. I only invest in cyclicals when they are considered close to cigar butts- low valuation/ high net assets/book value. If they are strong companies they often bounce back strongly, along with their share price. Quite pleasing when that happens too. Every earnings release feels like your birthday (if you pick well- of course). That is also wonderfully true of growth/value stocks…
Dear Tim, I had dinner with Mr. Buffett.
I'm a 26 year old CA native, investor and entrepreneur in both music and now beverages (I own a Kombucha Tea company).. I'm a fan of yours, Warrens.. and pu erh.
I had dinner with Warren Buffett around last Thanksgiving due to close family friends. Before meeting him, I was a becoming a believer in an EMP and "high probability" option strategies (strangles, etc).
Along with "the Intelligent Investor".. he also recommended Adam Smith's "Supermoney" – a must.
I'm now an aspiring Buffett-ologist, but can't shake interest in options. I'm sure you're working with more that 1M these days… so I wanted to offer a suggestion maybe you hadn't heard (along with value investing):
Try selling strangle positions about 50 days out, each strike at 2 standard deviations away from stock price. That should leave enough margin of safety to allow them to expire worthless a majority of the time. A woman named Karen has been VERY successful with this method: http://www.youtube.com/watch?v=BquDGE9KxZQ
Let me know how it goes. It's a strategy that really only makes sense when starting with a good chunk of change.
If you like Kombucha, stop by our place in LA sometime!
If your a lazy investor with no idea of how markets work, id suggest buying an ETF when there is 'blood on the streets' and from there dollar cost average and try to never look at your balance. from here, A bear market is actually a great thing, as you get more units for each $1 you put in, so when the next bull starts, your in a much better position.
If your an active market participant, there are far better ways to invest in the market than index etfs.
Its my view, that finance professionals etc advocate such etfs to keep those that do not understand how the market works 'Out of the market'.
A bull market MUST CLIMB THE 'WALL OF WORRY' as this keeps the weak, emotional, uninformed public who react to news and do not understand the game.. OUT OF THE GAME
The reason for this is that if you have all these weak people in the market, this creates unwanted resistance (sellers) that professional money has to absorb so prices can continue higher. This increases business costs… not ideal.
So , obviously professionals want the least amount of resistance as possible.
When a market correct occurs, its simply a case of professional money needing to flush out the weak, so the bull campaign can continue.
So simple, yet not many understand these concepts.
@ 25 I take an aggressive approach to my investment strategies outside of my 401k and Roth as I have very little financial obligations. I chose my shorts and longs primarily based on a fundamental approach. Shorter term for value while long term for growth. Technical evaluation comes into play when determining stops, targeted exits, etc. 5-7 companies max that I can watch in correlation to the market as a whole.
I was waiting for the "Enter Warren" part but ah well, next time!
I know warren buffet is mega rich and hes a really nice guy and blah blah. I just think there are better people to follow in terms of investing. Like Jim Rogers for example
Been there, but I was a youngster. I enjoyed the free dilly bars though. It was my cheat day obviously.
The book, "A Random Walk Down Wall Street", is a good place to start. It basically advocates the same strategy Mr. Buffet espouses: diversification across broad-market index funds, etfs, bonds, and some Real Estate Investment trusts—depending on your age and your risk tolerance. You should be in it for the long haul, and allow compound interest to be your friend. If you move in and out of the market a lot, your gains are often nullified by capital gains and investment fees.
90% of fund managers can't beat the market, and they charge you for the pleasure of investing with them. The old adage seems to be true: that monkeys throwing darts at a board could do the same (if not better job) picking stocks as these professionals.
Not so fast— Messrs. Buffett and Munger take a different view. From Tim's blog post (above): 'M: "The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity." B: "There are situations, for the full-time investor, where it'd be a mistake not to invest 50% of your net worth in one business.'
They reject Burton Malkiel outright and they embrace Graham/Dodd whole heartedly.
80% index fund, 20% algo trading. Worked for me. Sounds a lot of work, but isnt. Acutally, the 4 hour work week shows the way: no need to program yourself, you can outsource. What you will have to do, though, is read through the books of a few people who hacked not only finance but complexity in general. Go for the usual suspects of the Santa Fe Institute. From there on, you will quickly learn that the two most important articles on prediction of chaotic time series are from the 80s/90s, no match for modern computing power. Also, add a few piece on agent-based modelling (just to get an idea about dynamics), and artificial intelligence if you want to get fancy (in particular, deep belief nets and support vector machines). Last but not least, get "Trading Systems and Money Management", it gives you the surprisingly simple statistics behind successful trading. The 80% index give you a rather safe long-term bet, but the 20% will challenge you intellectually, you will develop a very good understanding of the market, and of course it gives you upside potential.
I'd throw the money into Bitcoin. Call me crazy.
Good Question –
Overrider – if you are employed full time then spend it all on a business. Preferably one that you don't have to manage. This will give you the time and cash-flow to spend more time as an investor. If you don't want to own your own business and prefer to invest while being an employee –
1. Find some people you trust and get their best speculative stock (that they themselves know a heap about and are heavily invested in) that is on the verge (12-18 months) of being cash flow neutral. Do your own research to quantify their views, and invest 30% in that one single stock. (note: doesn't have to be in your existing circle of competence as this will limit your options but it does have to be in the circle of competence of the person you trust.)
2. Join an Angel investors club and allocate 20% to making investments in start-ups.
3. Keep the rest in cash, and double down on your spec stock or your angel investments when the opportunity arises.
Once you get a 1X total return, start allocating 50% of your fund to long term stocks, selling only if you have to. Keep the other 50% in spec stocks/startups, and keep the strategy rolling. The only thing that changes is the size of the bets, not the bets themselves.
I used to do a little equity analysis, and I actually gave the same advice to a friend a couple of weeks ago: if you don't have the time, just by a Vanguard ETF that tracks the market.
The DJ Industrial & SP500 avg 8% return per year with 17% SD (based on data over the past 100 years); hence there will be a lot of ups and downs, but if you hold on to the ETF you buy, the expected return over the long haul is 8% per year. A full time professional investor puts at least 40 hours into just researching one stock/business, and most of these businesses don't get put into the portfolio (unless it's a index-type portfolio…which a lot of professional portfolios are…). Even then, most professional investors only beat the market by 2-4% consistently.
Hence, an 8% annual return avg is not bad, its probably the most efficient investment you can make considering you don't have to do any research, you just buy it once and hold it. Pretty much the only things you have to consider when buying a market ETF are: 1. Is the ETF maker reliable (Vanguard is) 2. Do I think the US economy will collapse & stop growing (probably not). We can't argue with the Oracle.
OMG! The first audio book I bought was The Warren Buffet Way by Robert G. Hagstrom and I remembered I wanted to buy a share of Berkshire & Hattaway so I could get to attend the annual shareholders meeting… I still have a piggy bank for that particular purpose. If I ever get too close to ask him a question that'd be "If I beat you and Bill Gates at the throwing newspaper contest, can I be your apprentice?" followed by where is the best place to eat steaks in Omaha
Sorry if I didn't answer your question, but I had to share this. -
i would take an asset i know most about (not something i have to take advice on from others). then split the million bockeroos as many ways as possible to hedge my risk so each can be tracked. given that i have some understanding of the asset class, most stock should rise to outweigh those that drop.
for me, take property in a rising market, you don't need to know the location as long as the estate agents / realtors are busy, thats a good sign. split your cash and leverage it to buy as many units as possible that appear "good" value for money.
then take your mind off the asset you've invested in, have a beer, check its value in 12-18 months so you don't constantly worry about it in the meantime (its value will probably fluctuate). if you've made a profit, consider divesting and enjoying your profit or re-invest it. Boom.
if you don't understand the asset you are investing in though, you are just gambling.
I'm 22 and have no experience so I'd have no idea how to answer that question.
Thanks for the post though, very interesting.
Funny he didn't say jus to put those million or a good part of it in BRK shares.
Tim, I recently launched my nutrition bar. I agree with Buffett. Because I believe in the product I am investing some of my money in my own business. But investing in one's own business would have to be high risk tolerance pattern, much different from investing in an index fund, no?
I agree on either low cost index funds or focused non-diversification (based on how much time you're willing to put into investing). I recommend Rule #1 (2006) by Phil Town along with The Intelligent Investor (1973) by Ben Graham and Security Analysis (1934) by Ben Graham & David Dodd.
Phil Town's blurb on your cover is why I first bought 4HWW. (Thanks for signing my 1st edition when we met at Calabasas with Neil last October. I was tongue tied at meeting you and could have talked your ear off about investing had I suspected your interest. Neil has video of me doing that from last July.)
My 14 year old daughter manages her own portfolio using Graham/Dodd (Buffett/Munger) ideas and has been invited to do a TEDx talk in Zürich based upon her experience. (I can offer you a guest post on that if you like.)
Sincere respect
I'd invest in learning how to build businesses.
Rather than spending the money on an MBA though, I'd consider things like actually starting the business, hiring staff more experienced than I in my weak areas, testing, failing, reading material, etc.
I'd say sequencing is important
The person steering the ship might not be more important than the ship but if he/she doesn't know how to pick a good ship or how to steer it, good luck getting to the other side of the Atlantic.