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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
After reading this, I'm making my plans to go next year.
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 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
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...
@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!
Brown Is The New Yellow - you heard it here first!
You'll learn more about real life investing than in any B-school and it's free!
Enjoy!
Do you personally know anyone who has ever successfully built wealth mostly from investing primarily in stocks, bonds, mutual funds, and/or index funds?
http://jeffnabers.com/2008/05/02/how-come-ive-b...
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?
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.
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.
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
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...
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
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
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
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
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.
Of course, maybe he learned his lesson BUT, it is reported that he collected "hedge fund" type fees in his earlier years..
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%)
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.
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/letter...
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.
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.
Can you guys recommend books that cover these 3 functions....thanks,jeff
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.
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.
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.
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.
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!
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.
“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/d...
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.
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.
###
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.
@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).
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.
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
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.
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
Cheers
Jose
"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
@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
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?
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.
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/pa...
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
So what's in store for the future? Trip to the moon anytime soon?
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.
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,
Tim
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!
Lawrence: I'll tell you what I'd do, man, two chicks at the same time, man.
con toda mi admiración, desde Argentina
Marcos
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
pc@corestates.us
90% TIPS
10% Call options on the S&P500
This 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.
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,
Eric
I asked the same question that you did, and he gave me the same answer that WB did
I recommend his book on this topic:
Investors and Markets: Portfolio Choices, Asset Prices, and Investment Advice
Buen día,
Luis
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.
Peace.
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.
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.
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!
Hugs,
Jen
A: I would invest, $100k - $200k in 5 -10 online startup businesses. All businesses run by young inspired entrepreneurs that I trust.
“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.”
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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.
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.
Best
Jose
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,
Paul
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
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)
70% in DRiP stocks (http://en.wikipedia.org/wiki/Dividend_reinvestm...)
I like these:
IBM
PFE
WTR
JNJ
AFL
20% in no load index fund -- Tax Free Bond Funds
VWITX or
VWLTX
10% money market (liquid)
Spread it around accounts but deposit enough to avoid fees:
http://www.bankrate.com/brm/rate/mmmf_highrateh...
---
(nice lists of funds, a bit dated however)
http://www.fool.com/mutualfunds/indexfunds/tabl...
http://www.fundadvice.com/explode.html#Here
Please contact me if interested in how I came up with these.
Tim you're the greatest thing since Rita G.
Thanks for the clarification on the asset mgmt fee..
I knew there was something that I forgot..
Cheers
Jose Castro-Frenzel
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.
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")
I am selling all my VISA stock. Go with something that will last!
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.
Cheerio,
MM
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.
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!
...
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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,
Tim
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?
http://www.shoppbs.org/product/index.jsp?produc...
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! :-)
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?
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 am a bit confused. Did Tim mean "Ben Graham"?
thanks
Munger said Ben Franklin. He's a big fan, as am I.
Best,
Tim
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 book :)
3. 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.
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.
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.
Warmest,
Cole
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.
- 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.
Cheers,
Robert.
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...
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 :)
Peace
"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.
Steve
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.