Jared Wiese 🐝 en Personal Finance and Investing, beBee in English 🐝Brand Ambassador • Résumé/CV & Creator♦Business Analyst♦Lifehacker♦Strategist♦Coach • beBee 28/9/2016 · 5 min de lectura · 1,4K

How to Invest Better and Safer Than Warren Buffett

This post is both a 10-point critique of the Ultimate Cheat Sheet for Investing post from James Altucher, coupled with better tips I have learned over the years about investing. The gist?

Someone who bought an S&P 500 fund... would have made three times their money... Legendary stock picker Warren Buffett... put 90% of its assets for his wife in a "very low-cost" S&P 500 index fund. 
http://money.cnn.com/2014/12/07/investing/stocks-active-versus-passive-investing/index.html

My post will show you how you can do even better and why.

How to Invest Better and Safer Than Warren Buffett

Mr. Altucher has certainly dealt with money and learned a thing or two. He made a ton inside Wall Street, then lost it all - many times! He also has a way with words. But overall, I tend to agree with him, "So why should anyone listen to me about investing? You shouldn’t." 

Instead I'd suggest really listening to Warren Buffett or do even better by taking advice from Jack Bogle (Vanguard founder). Let me explain...

Quick Proof

Not sure this is true? Did you know Buffett has a 10-year bet with a hedge fund that took on his active-passive investing challenge? Guess who is winning...

"Altogether, Buffett's index fund bet is up 65.7%, while Protégé's basket of funds (more on that below) is up 21.9%."

How I can help you

I started with basic knowledge like everyone else and a few extra bucks. I followed bogleheads.org and fool.com. I went by The Motley Fool's tips, looking for the the right stocks, based and proven criteria. I put a huge chunk in tech companies just before the .COM bubble, watched my money double, then fall to nearly what I started with in no time. I allowed my emotions to get in the way, thinking, "hang on... this is proven... it doubled and can do better.. don't sell now, as you never sell when it is 'low'." Then I did a little more watching - a lot more contemplating - and sold it all with luckily a little loss.

Lesson learned. Active trading was not for me.
I also learned I don't have the aptitude or attention to crunch the numbers looking for value, like Buffett does. Enough about me for now.

1) We don't know!

Mr. Altucher has almost 46,000 views and 718 likes on his post! Following are the keys I took from this post and what I would do differently. He starts with a great emphatic guideline...

The most important three words in investing is: “I don’t know”.
James Altucher

So far, so good. In fact, this is the main investing strategy that I follow - "buy and hold" - as we simply do not know. 

Mr. Bogle, the founder of Vanguard, has done tons of research on how we cannot beat the market over time. Likewise, Mr. Altucher warns against day trading, holding stocks forever or a split second, the Madoff allure he tried to invest in, then correctly asserts about stocks, "it’s almost impossible to pick the right ones".

Gone are the days of new or inside information. Those Wolves of Wall Street have the 1% riches locked up away from the average 99% investor. 

2) No more than 3% in any one stock... unless it grows beyond that.

OK, there a some issues here with Mr. Altuchers point.

Why the 3% rule? “Because you’ll never know anything about a company and you won’t get the kind of deals that Warren Buffett gets". I couldn't agree more. In fact, 1-3% is what the typical mutual fund holds in any given stock.

Why "unless it grows beyond that"? He quotes Warren Buffett: "If you have Lebron James on your team, you don’t trade him away.” Yet that is often precisely when you sell a stock - when it has gone up (or retires ;). You don't want to buy 1% of it, watch it go up to 5%, then tumble down to 2% or worse.

Buy Low/Sell High: The investing mantra is to buy low, sell high. The paradox is that NOBODY consistently knows when it will reach a high. For those hedge fund managers, like in The Big Short, some rich insiders get lucky. But most watch as the market at times may go up, then suddenly plummet.

Buying high and selling low is the worst possible strategy! But most people think of the "market" as being the S&P 500 or worse, the Dow 30. Instead, you want at least one world index for stocks and one for bonds. The more indexes you have, the better diversification. My advisor found research based on Harry Markowitz's Nobel Prize in 1990:

"Diversification may be the single biggest aspect of good investment returns. The goal is to produce superior compound results."

Buy and Hold: In short, follow a buy and hold strategy - investing only money you can live without for 10 years or more, while rebalancing when your targets get too out of whack, say +/- 2-5% for each asset class or for your stock/bond ratio.

3) He says to own no more than 30% stocks

That's not too bad. However, we all have different risk levels AND it should decrease as we get closer to retirement.

There is an old rule of thumb for stocks vs bonds, "100% minus your age". This would mean for a typical 60-year-old, 40% of the portfolio should be in stocks. However, this has been revised largely due to longer life expectancy. The result is now more like 120 or 130 minus age, as seen by major fund companies and their target-date funds. "For example, funds with a target date of 2030 are geared to investors who are currently around 49. But instead of allocating 50% of its assets to equities, the Vanguard Target Retirement 2030 Fund has roughly 76%. The T. Rowe Price Retirement 2030 Fund builds in even more risk, with almost 80% in equities."

4) He dislikes mutual funds.

If you like the idea of a one-stop mutual fund, such as a target-date fund, I'd agree with him that you should avoid them. He says "bank representatives that push them, consistently lie about the fees they are charging". I would never buy a fund or any investment "from a bank." They have higher fees than average and pay out less (see below).

Many advisors also recommend against target funds. I would agree, as they are basically funds of funds, so more fees. The benefit is that you set it and forget it - again, for a fee. Instead, I'd suggest 1-4 times/year looking at your allocation and rebalancing as needed. In fact, that is exactly how you achieve sell high! Yet, he says "Mutual funds don’t outperform the general market so better to invest in the general market without paying the extra layer of fees." I disagree... For a great background on the S&P 500 and what beats it, see this article.

5) Active vs Passive

Day trading is active and he advised against that right up front. However, he does not mention passive investing. Per this article, 'The market has soared in the last five years, but active fund managers by and large haven't been able to beat it. Passive investors, on the other hand, have been able to sit back and get rich. Someone who bought an S&P 500 passively managed index fund in early 2009 would have made three times their money.

Even legendary stock picker Warren Buffett likes that approach. In his annual shareholder letter last year, he wrote that he's advised the trustee of his estate to put 90% of its assets for his wife in a "very low-cost" S&P 500 index fund, because he believes the "long-term results from this policy will be superior to those attained by most investors." '

However, there are even better index funds than the S&P 500 "market". Why:

  • The S&P is mainly large, US, growth companies - but not small, value or international - which are other key asset allocations you need.
  • The S&P adds (buys high) when stocks get high enough to make the 500 cut.
  • The S&P is forced to sell losers when they no longer make the 500 cut (sell low).
What's better is a Total stock market index.

6) What to do with the 70% non-stocks.

Mr Altrucher says, "Cash is king." Seriously?! Here is how we can do better:

  • My bank offers 0.01%/year right now. Remember earlier that inflation averages 3.1%. Sooo... that means I am LOSING 3.09% at the bank. In that case, he is right!
  • Wonder what rate the banks get? Banks charge each other a rate of 0.36%. How nice. They get to make at least .35% off me!
  • Want to do better? Online savings offer as much as 1.05%. That is still not as good as 100% bonds have done historically, 5.4%. Move to a 30/70 stock/bond mix gives you 7.2% with the same 14 of 90 years with a loss. That is why you don't get into stocks or bonds unless you have at least 5-10 years to invest. Moving to a 50/50 mix yields 8.3% but loses 17 of 90 years. Even better, with a bit more risk, a 70/30 mix earns 9.1% and loses 22 of the years. Keep in mind, this is not years in a row.

Which funds, then? 

He wisely references Warren Buffett, saying "I wrote THE book about him" but fails to point out the biggest wisdom for the average person from Buffett. A commentator to Mr. Altucher's article clarifies that most of us would be better to follow Mr. Buffet's explicit plans for his own money, found here. The summary quote in this article:

My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.  

7) Houses as investments

I like what he says here. "Fees and taxes that never go away... too-large a percentage of someone’s portfolio... massive debt" and the classic case we all witnessed in 2008 - they can lose money!

For gains, he says "Housing has returned 0.2% per year in the past 100 years". One possible source says houses made 3.3%/year and inflation was 3.1%, hence the 0.2% gain. Yet he gives an example of making $100,000 on $200,000 after 10 years, which is more like 5%.

Still, it is nowhere near the average 8% average historical gain you get in stocks. The single biggest recommendation by advisers to avoid or minimize debt. Get 15-year loans or make extra principal payments to reduce the interest.

8) What about the financial news?

This may be his best advice:

"The news has no idea about the financial world and what makes it tick. Any investing off the news is like taking out your eyes because you trust a blind person to drive you to work."
James Altucher

9) Save Money With Each Paycheck?

He says no. I could not disagree more. Pay yourself first, at least 10% just like tithing, so you never even see it. Then adjust your lifestyle accordingly. If you have a 401(k), meet the employer match (usually 6%) and then look into Roths. If you have more money, max out both of those. The 401(k) max is $18,000 and is tax-deferred, while the Roth max is $5,500 and you pay taxes now. Which, largely depends on how much you will "earn" when you pull the money out. Talk to an advisor for more information.

10) Invest in yourself?

I love that! It's called Human Capital. It is your only security and way to earn more money - whether you're building that nest egg... or rebuilding it, like he has many times.

Conclusions

This post was both a 10-point summary of James Altucher's similarly named investing post coupled with my tips I have learned over the years about investing.

Main photo: Shai Barzilay: https://www.flickr.com/photos/shyb/


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Ben Pinto 1/10/2016 · #8

I agree Dean about the deep pockets. It is just like people that go to a casino with a gMbling strategy. If they had the money to match the casino and were allowed to bet it - a strategy could help, but if one has bottomless pockets then no need in having bottomless shorts. LOL #6

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Jared Wiese 🐝 28/9/2016 · #7

#6 Likewise, I'm no expert, but always curious... Sure, would love to hear about it. Send me a message?

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Dean Owen 28/9/2016 · #6

#5 Hi Jared, I am by no means an expert on Warren Buffet, but having casually watched his trades over the last few decades I think there are important lessons to be drawn, like not getting involved in things you don't understand, having a long term horizon etc. He is greedy, not for himself, but for his shareholders. He does have access to information but also makes it a point to meet with the CEOs of the companies he invests in. But I think ordinary investors would have a hard time emulating his trading strategies as they require deep pockets to be able to withstand the potential drawdowns on individual stocks. I watched one of his investments, BYD, drop from 90 down to 20 and he didn't even flinch. Investors can certainly buy BRK-B as an alternative, but I would recommend waiting for the next financial crisis as an entry point to accumulate long term long positions in anything. As for me, I trade markets that have been trending sideways and employ put and call warrants to capture peaks and troughs. The Hang Seng has had a pretty good run up these last few months, so it's time to go long puts I think, as there is usually a correction. I use Fibonacci, Bollinger Bands, RSI and other technical analysis tools to predict retracements, support/resistance etc. I'd love to hear your opinion on a trading strategy I thought of, based on probabilities.

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Jared Wiese 🐝 28/9/2016 · #5

Hi @Dean Owen. I cleaned up my article a bit. Thanks for all the great comments and the link to your post!

Even though he said “Be Greedy when others are Fearful” you pointed out that 'personal greed plays no part in what motivates the 86 year old'. When buying oil or anything for that matter, 'no doubt a calculated decision that was derived from a meticulous bottom up analysis of the company at stake.' That seems to be his classic value approach.
Yet it appears he made that realization the hard way. Odd that he kept buying Conoco when it was already hitting peaks. Perhaps goes to the point that even with all his research, one never knows.

Per this Forbes article that I read recently, http://www.forbes.com/sites/moneybuilder/2013/05/08/the-worst-investment-of-warren-buffetts-career/#335d54a2227c, he actually feels buying Berkshire Hathaway was his biggest mistake! If he had not, he'd be worth double. It was an ego thing!
I'd say he learned to stick to his forte of crunching the numbers, finding value and then 'usually' buying low.

I was also missing a link, http://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13:

"you and I aren't Warren Buffett.

The researchers put it this way:
Warren Buffett's record by the start of our sample period strongly suggests he is a gifted trader. His success in subsequent years in generating abnormal returns doesn't in itself imply market inefficiency. Rather such returns can be construed as compensation for his extraordinary talent and acquisition of private information.

Do you have access to the same private information as Warren Buffett? Do you have his level of investing skill? Does your financial adviser?"

You mention a long put. Are you seeing the Big Short all over again ;)

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Dean Owen 28/9/2016 · #3

#2 like I say, everyone thinks they are a genius in a bull market (US) and that strategy has done well. But it would not have done well in the markets I trade (Japan/HK/China) where one needs to be adept in the warrant market (I am currently long puts)

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Jared Wiese 🐝 28/9/2016 · #2

#1 Ah, but that's just it: you're always riding on someone's coattails. Better to go passive, low cost indexes, set it and forget it!

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Dean Owen 28/9/2016 · #1

There is some great advice here, but as with everything in life, timing and location. Everyone thinks they are a genius in a bull market. For me, Buffet sums it up best with his "Be greedy when others are fearful". His timing is impeccable and he buying spree starting early 2009 a few months after the Lehman collapse was brilliant (although he most likely was talking to Geitner/Paulson quite often back then). I try to ride his coat-tails, but it requires huge gonads to not employ stop losses. Doing well with BYD, a Chinese electric car automaker that Buffet has a heavy stake in.

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