How to Invest Better and Safer Than Warren Buffett
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.
My post will show you how you can do even better and why.
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...
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”.
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).
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."
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.
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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