There are very few financial concepts where I disagree with Warren Buffett.
He’s brilliant and thoughtful about any advice or opinions he puts out there.
And for those of you who are just here to leave me a dislike for “slandering Mr. Buffett’s
good name” … I suppose I appreciate the engagement - that’ll help boost this video,
at least, in the YT algorithm - but I hope you’ll stick around to at least hear what
I have to say.
After all, I’m sure Buffett would encourage everyone to challenge the things that anyone
(including himself) tells you in order to come (with conviction) to your own educated
conclusions.
That’s how you grow as an individual.
Heck, that’s how he developed many of the practices and beliefs he holds onto today.
So, although there are a handful of financial matters on which I disagree with Buffett,
2018’s Annual Shareholder Letter (that was released over the weekend) really highlighted
one of them for me - I’d love to share that with you and know what you think about it.
--
Hey there, my name is Stephen Spicer and it’s my goal to help you invest smarter.
And a big part of that is helping you identify some of the potentially-ruinous flaws with
the way almost everyone tells you to invest - which also happens to be the way Warren
Buffett recommends that most people invest.
And he brought up a few things in this letter that demonstrate that he understands and can
relate to at least part of my concern...
Now, if you watched my last video on the takeaways from the annual letter - which you should,
there were a lot of positive and valuable takeaways - I talked about how defensive Buffett
is with Berkshire’s significant cash equivalents and his words of caution about being prepared
for something that has NEVER happened before - to expect and be ready for the unexpected.
I also talked about in that video how I agree with him about the need to prepare come what
may.
That’s the reason I do what I do.
That’s the theme behind my book.
You should be prepared.
Where we disagree, however, is on that method of preparation.
I don’t think - and I hope this doesn’t come off as too blasphemous to the traditional
investing community - but I don’t think the stock-and-bond-only portfolio is enough
to prepare for that mega-catastrophe (Buffett’s words) about which he is so concerned.
He clearly uses cash - specifically United States fiat currency and its debt equivalents
- to provide himself with that protective buffer.
But still, I don’t think that’s enough - stocks, bonds, and cash.
I think if you really want to prepare… you have to venture further - intelligently diversify
more than that.
I talked about that ad nauseam in my most popular video to date - so if you’re looking
for some specifics, that’d be a great place to start - I’ll be sure and link to it (and
everything else - as I always do) in the description.
--
But here’s why it’s not enough: Let’s start with bonds...
Most financial “experts” (professionals, your advisor), when they’re running your
analysis and talking about the returns that you should expect from bonds between now and
the time you retire, will tell you to expect around 5% over time….
maybe, worst case, 3%.
But, they’re the conservative piece of your portfolio, they’re the backbone should stocks
crash… blah, blah, blah - surely you’ve heard something along those lines.
My biggest problem with this is that to get those numbers, most advisors are referencing
the returns generated from bonds over the last few decades.
That doesn’t sound unreasonable…
You see, from 1982 through today, bonds have averaged around that 5% per annum return.
That’s all the proof you need, right?
So, between now and the time YOU retire - whether that’s a decade, or two, or more - you can
reasonably expect 5% per year.
Surely nothing below 3%!
Right?!
After all, that’s what’s happened over the last 4 decades… so there you go - rest
easy.
The problem is that just because that’s what happened in the past, that doesn’t
mean that’s exactly what you should expect in the future.
The world doesn’t just work like that…
And the nice thing about the bond market (at least for me to make my case here) is that
it’s proven this very fact if you just look at the cycle before 1982.
From 1953 through 1981, bonds averaged 0.2%.
Now, if you’re counting on nothing less than 3%, that’s gonna hurt your projections!
Like, big time.
But even then, as Buffett says, that’s not to say that something unexpected couldn’t
happen in the future resulting in an even worse cycle than that one.
--
If you’re looking for a little more color as to what I’m talking about with bonds,
there’s a section on it in my book - I also filled up an Instagram caption about it, if
you wanna go follow me over there.
And then we have: cash… there's a whole world of concern there, but that’s probably
beyond the scope of this video.
So, I’ll just move past it and leave that to Peter Schiff or David at The Money GPS.
What I specifically want to address is where Buffett, in his letter, elaborates on and
justifies his case for stocks.
And there’s a part in the middle of this quote that really stood out to me - I’ll
highlight it for you.
He says:
If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had
been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January
31, 2019 (the latest data available before the printing of this letter).
That is a gain of 5,288 for 1.
Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension
fund or college endowment – would have grown to about $5.3 billion.
Those who regularly preach doom because of government budget deficits (as I regularly
did myself for many years) might note that our country’s national debt has increased
roughly 400-fold during the last...
77 year[s].
That’s 40,000%!
Suppose you had foreseen this increase and panicked at the prospect of runaway deficits
and a worthless currency.
To “protect” yourself, you might have eschewed stocks and opted instead to buy 3
1⁄4 ounces of gold with your $114.75.
And what would that supposed protection have delivered?
You would now have an asset worth about $4,200, less than 1% of what would have been realized
from a simple unmanaged investment in American business.
The magical metal was no match for the American mettle.
Cute.
These are great lessons for a student of history.
Yes, gold in no way kept pace with the US stock market.
But this information - this data from the past - can’t (shouldn’t) be used to prove
what will happen in the future.
It doesn’t work that way.
Now, before I explain myself a little further with a couple of examples, let me say that
I do still appreciate and LOVE the perspective that he brings to this reality.
He’s right: if you told me today that the US national debt would increase by 40,000%
over the next 77 years.
Well, I’d say NO WAY!
Impossible.
Something will break first.
And I think most people would say that… and I think that’s the truth.
But that’s precisely his point.
If presented with that same statistic 77 years ago, surely you would have thought it outlandishly
impossible.
Yet here we are…
Although I find that fascinating, it’s in no way proof that “American mettle” (as
he puts it) can continue at this pace, if (I’d like to say: when) we finally suffer
through the consequences of that out-of-control national debt.
He actually brings up a really good point: how much further can it really go?
Surely, he’s not suggesting that it could continue its trajectory without severe consequence
at some point.
All his observation does is prove is that it is possible for this to happen.
And fine…
I’ll give him that: it is possible for us to go another 77 years at this pace without
issue.
...ug, that’s painful to say…
Possible, yes.
Highly, highly improbable, I think so.
...you get the idea.
But I think it would be naive to plan your investments assuming that WILL be the case
- that there won’t be any issues - that everything will continue just like it has
over the last 77 years.
And sadly, that seems to be what educators and MOST professionals just continue to regurgitate.
--
Now, if you watched the companion video to this one I brought up Buffett example of Russian
Roulette.
You know, the game where you have a six shooter pistol but only one bullet in the chamber.
You spin the chamber, hold it to your head, and pull the trigger.
There are 5 chances that nothing will happen.
And one ...that you end up dead.
So, if I offer you a large sum of money to play, is it a good idea?
Should you do it?
I mean, clearly the odds are dramatically in your favor.
NO!
The answer is NO.
And if you were tempted to answer yes to that, reach out to me - we can talk about it.
But no… as Buffett said:
A Russian Roulette equation – usually win, occasionally die... would be madness...
Rational people don’t risk what they have and need for what they don’t have and don’t
need.
And with Russian Roulette, you’re aware of the odds: they’re 5 to 1.
But in the world of investments, you don’t.
And if we’re talking about that mega-catastrophe the likes of which have never been seen - “The
Big One” that Buffett mentioned - the odds of that happening versus a normal day in the
market where the action is within what you would expect - the odds are like 1 to thousands
or tens of thousands.
So, as those catastrophic events don’t happen - because they don’t very often - people
start to think that they won’t - that they can’t…
Here, we can actually use history to prove my point here.
You see, you can prove that it’s possible for something to happen, just by one occurence.
(But, unfortunately, you can’t do the opposite - you can’t prove that something can NEVER
happen - no matter how much time passes without occurrence.)
And history is riddled with examples of things that had never happened for decades or even
centuries finally happening…
I mean, there’ve been stock markets that have existed and even thrived before that
don’t exist anymore.
And I know that’s extreme, so let’s not get that crazy and let’s just look at a
couple examples from the 80s:
I’ll give you two here in this video and we can talk about more later if you want.
In both cases, history could have been used to provide a compelling case, but that case
turned out to be a disastrously incorrect predictor of the future:
Before October 1987, the Dow had never fallen more than 13% in a single day.
Can't you imagine advisors and pundits saying that a drop of much more than that would be
impossible?
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀ I mean, it had never happened before - there
was roughly 90 years worth of evidence that it wouldn’t - so surely it couldn't...
right?!
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀ Wrong!
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀ WAY WRONG!
On Black Monday, October 19th, 1987 (Black Tuesday for my Australian viewers), the Dow
Jones Industrial Average fell a devastating 22.61% in a single day!
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀ Pundits were blindsided.
Advisors panicked.
The sky was falling - no one knew what to do.
Everyday investors lost BIG TIME!
They didn't realize an event like this was possible, so they didn't prepare (their portfolios
or themselves (mentally)) ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
My point?
⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀ Just because something has never happened
in the market before, doesn't mean it can't or won't.
--
Study Japan in the late 1980s and you’ll discover a very similar scenario.
From 1949 through 1989, the Nikkei 225 (like our S&P 500) soared from like $40 to just
about $40,000.
It was a pretty consistent climb.
Every time there was a dip, it predictably just came right back and continued on up.
40 years of compelling data.
“This is what the market does - it just continues to go up.”
And if there ever was a dip or crash or recession, obviously you should just “stay the course”
because over the long run the market always goes up…
Sound familiar (to today)…?
Well, turns out, that was the absolute wrong advice for someone investing in Japan in the
late 1980s.
The market fell over 80% over the next couple of decades - it didn’t hit the bottom until
2009 (if that even is the bottom…) - you see, that market still sits around half its
former high.
(For Japanese investors, that time is known as the Lost Decades.)
--
I’m not predicting a crash here.
I wouldn’t be surprised, but this is not a prediction - that’s not the point of this
video.
The point is: you can’t use historical data (I don’t care how much) to predict what
will happen forever into the future?
It is at least within the reasonable realm of possibility that a time will come where
those who are doing that - investing in that way, under those assumptions - will be sorely
disappointed.
--
It can be a difficult pill to swallow.
I get it!
It means you’ll need to take more responsibility for the way you’re investing.
Which means more stress, more concern.
That’s a hard reality - I get that!
And I fully expect some dislikes for that reason alone - I mean, “if this video gets
enough dislikes, I must be wrong, right?”
I’m not selling sunshine and rainbows ...that’d be MUCH easier.
But there weren’t people - or at least not enough - sharing this message, this perspective.
This is why I do what I do.
This is why I left my industry career.
This is why I’ve put most other ventures in my life on hold because I want to help
you - I wanna help all who are interested - to invest smarter.
In fact, getting worked up about all this after reading Buffett comments, has reignited
that flame.
If you’re interested, I’m gonna go back to the roots of my message and put together
a couple of videos exploring these potentially ruinous flaws with the way almost everyone
tells you to invest.
I hope you join us - hit subscribe and the notification bell.
Raise your hand in the comments - agree or disagree, that’s okay, let me know where
you’re at with this.
And let’s start investing smarter.
I’ll see you in the next one!
Take care.