Picking Warren Buffett’s Brain: Notes from a Novice 133 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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133 Responses to “Picking Warren Buffett’s Brain: Notes from a Novice”
6:15 pm
Tim,
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!
-Dave
6:22 pm
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:)
6:24 pm
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.
6:28 pm
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.
Cheers
6:39 pm
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…
7:33 pm
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? ;)
7:45 pm
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!
8:18 pm
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!
8:41 pm
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!
Enjoy!
8:42 pm
Sorry I meant http://www.bogleheads.org. Check it out.
8:46 pm
@Tim
Do you personally know anyone who has ever successfully built wealth mostly from investing primarily in stocks, bonds, mutual funds, and/or index funds?
8:56 pm
Also, I just recently did a post about the flaw in investing in index funds. It’s actually quite simple and easy to understand.
http://jeffnabers.com/2008/05/02/how-come-ive-been-losing-4-per-year-over-the-long-run-in-a-stock-market-that-returns-10-per-year/
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?
9:26 pm
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.
9:56 pm
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.
10:31 pm
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.
10:36 pm
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.
11:29 pm
Haha,
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?
Cheers
Jose
11:33 pm
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…
12:19 am
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!!
Jose
1:08 am
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
1:32 am
[...] Picking Warren Buffett’s Brain: Notes from a Novice, Tim Ferriss shares the notes he took at a recent convention for Berkshire Hathaway shareholders. [...]
3:12 am
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:
TIPs
Short term treasuries
4:17 am
Tim,
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
4:21 am
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.
4:22 am
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..
6:02 am
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%)
6:15 am
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.
6:17 am
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
6:22 am
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.
6:23 am
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.
6:40 am
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.
6:41 am
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
7:38 am
@ 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.
8:09 am
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?
8:09 am
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.
8:39 am
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.
8:43 am
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.
8:59 am
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.
9:21 am
Tim,
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!
10:01 am
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.
10:20 am
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.”
HERE’S WHAT I WOULD DO:
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…
https://www103.ssldomain.com/tradingontheedge/default.aspx?mi=47
10:27 am
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!
10:30 am
Tim,
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.
11:38 am
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.
11:50 am
you spelled volatility wrong in the survey
###
Doh! Thanks for catching the typo. Fixed. -T
11:51 am
@Francesca
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.
@Aaron
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).
12:24 pm
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.
Jeff
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.
12:54 pm
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…
1:04 pm
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 Well
Anyone have any suggestions for studying these three topics without an MBA program?
Graham
1:45 pm
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.
2:03 pm
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.
2:40 pm
Tim
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
4:05 pm
Well simple advice invest in Visa ( V ) , just look at the 300% mastercard made.
Cheers
Jose
4:21 pm
@ 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 White
If 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.
TimW
Phoenix
4:36 pm
@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 :-D
4:45 pm
@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.
5:00 pm
Tim,
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
5:21 pm
@Jeff,
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?
5:41 pm
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.
5:48 pm
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”.
http://b2logs.com/blog/weekly-finance-update/passengers-please-remain-calm/
5:53 pm
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
7:41 pm
[...] 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 [...]
10:02 pm
ok, I would say not a normal day!
So what’s in store for the future? Trip to the moon anytime soon?