I’ve watched and read all publicly available material
to bring you the most important investment advice
from Warren Buffett in 2018.
This year, the world’s greatest investor:
- Won a 10-year bet proving that most Wall Streeter’s
truly do not deserve their high salaries
- Explained what investment risk really is,
which I will use to help guiding you in your first home purchase;
and
- Gave his ultimate checklist for which stocks you should buy for your portfolio
This is the Swedish Investor,
bringing you the best tips and tools for reaching financial freedom,
through stock market investing.
Warren Buffett has often said that
the best way for a passive investor to reap the benefits of the stock market,
is to invest in a cheap index fund.
Putting his money where his mouth is,
he issued the following bet:
“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017,
the S&P 500 will outperform a portfolio of funds of hedge funds,
when performance is measured on a basis net of fees, costs, and expenses.”
Even though many active managers on Wall Street are eager to tell potential clients
about how their funds most certainly will outperform the S&P 500 index,
ironically, for a long period, all Buffett could hear was silence.
No one wanted to act on this bet when their own money was involved
(I think this in itself was probably enough
to understand who was going to be the winner here).
But then a firm called Protégé Partners,
which specialized in identifying, seeding and early stage investing in investment funds, stepped up.
It chose 5 fund-of-funds,
which themselves invest in hedge funds
and Buffett chose a low-cost S&P 500 index fund sold by Vanguard.
Each put up $320,000
which by the end of 2017 would be worth $1m
and would then be invested in the winner’s choice of charity.
Props to Protégé for taking this bet when no one else dared to,
but I don’t know if they ever expected to win or if it was just a way to get publicity.
Anyways, these were the final results of the bet
which Buffett presented in the 2018 Berkshire Hathaway annual shareholder letter.
These are truly some staggering results.
The 5 funds had an average return of about 3% per year after fees, costs, and expenses,
while the Vanguard index fund had an 8.5% return.
So they underperformed by about 5.5% per year.
But the most astonishing result in my opinion
is that not even a single one of the funds were able to beat the index fund.
This is hilarious.
I think it proves two things.
It shows that as Buffett says:
“Performance comes, performance goes. Fees never falter.”
It also shows that most active managers on Wall Street truly do not deserve their high salaries.
They are just fooling uninformed customers with smart marketing.
Another quote by Buffett:
“When a person with money meets a person with experience,
the one with experience ends up with the money
and the one with money leaves with experience.”
Forget about the alphas, betas, gammas, or any other insider language
that the priesthood on Wall Street likes to use to scare you out of managing your own money.
Investment risk has never been about that,
and in Berkshire Hathaway’s 2018 annual letter to shareholders,
Warren Buffett gives the correct meaning:
“Investing is an activity in which consumption today is foregone
in an attempt to allow greater consumption at a later date.
“Risk” is the possibility that this objective won’t be attained.“
Let’s use this definition of risk to answer the million-dollar question:
You’re going to purchase your very first home in X years. Should you:
a) Invest in stocks?
b) Invest in bonds?
or c) Keep the money in cash?
The answer will be useful for any purchase involving a huge outlay of money.
For example, if you are saving for a nice car, a boat,
or an upgrade of your current home, it applies as well.
So, we have three options:
- Invest in stocks
- Invest in bonds
Or - Keep your savings in USD
Let’s first note that keeping your savings in USD is not that great of an idea.
As the FED has promised a 2% inflation each year,
it is pretty much guaranteed that your money will buy you something less valuable at a later stage.
The only way in which this won’t happen is if housing prices collapse
(which is possible by the way)
but as we are considering outlays of cash in general,
we shall assume that the price of the asset
you are interested in purchasing with your savings
move with inflation.
When deciding whether you should put your money in stocks or in bonds,
let’s conclude that stocks have enjoyed a landslide victory
in returns over bonds during the last century,
so, most of the times when stocks don’t lose money,
they will be a better investment than bonds.
With that out of the way.
Here’s the investment risk of investing in stocks depending on your time horizon.
I’ll also add the returns that you would have achieved o n average
depending on those horizons.
Here are a few highlights:
- If you are going to have a large outlay of cash in 1 year,
historically, your money would be worth less in 33% of the periods
by investing in the stock market.
On the other hand,
you’d be able to buy something 8.4% fancier on average.
- With a time horizon of 5 years,
your money would be worth less in 25% of the times,
but on average, you’ll get something 47% nicer.
- With 10 years, 12% of the times you’d be worse off,
but on average you’ll get something more than twice as large, fancy or good.
- And for 18-year periods and longer,
there hasn’t been a single occasion of negative returns in the stock market since 1928.
Also, you’d get something which is 4 times as nice.
Sweet.
This chart won’t make any investment decisions for you,
but I hope that it can help you as a guide,
if you expect to have any larger outlays of cash in the future.
It also highlights a very important takeaway:
“As an investor’s investment horizon lengthens,
a diversified portfolio of US equities
becomes progressively less risky …”
Here are Buffett’s 2 cents on investment risk in relation to Berkshire Hathaway:
“Since I know of no way to reliably predict market movements,
I recommend that you purchase Berkshire shares
only if you expect to hold them for at least five years.
Those who seek short-term profits should look elsewhere.”
Investing in index funds truly is a smart 80/20 concept
for managing your own money.
You’ll get lots of the benefits of investing
and you basically don’t have to spend any of your time doing it.
But I know that many of you want more than that.
You don’t find an 8.4% average return satisfying enough.
You want to achieve financial freedom at an early age.
You want to become the next Warren Buffett.
For those of you that identify with this,
here’s the best summary that I’ve seen so far
on which individual companies and stocks
that Warren Buffett himself invests in.
Buffett wants to see a company with:
- Durable competitive strengths
- Able and high-grade management
- Good returns on net tangible assets required to operate the business
- Opportunities for internal growth at attractive returns;
and
- A sensible price
Explaining these individually would take too much time for this single video,
so, therefore,
I will give you a watching list in the description of this video
where you can dig deeper into them yourself.
I will say this though.
It could be a useful thing to visualize
individual stocks and companies for yourself
using these 5 key characteristics.
For example,
you could rate a company you are interested in
on a 0-5 scale for each of them.
By doing this, you’ll force yourself to make the research
which is required to be a successful active investor.
Moreover, you’ll force yourself to use an investment framework
with a proven track record.
After all, the man who invented it became the world’s richest by applying it.
That’s it for this one,
but if you can’t get enough of the wisdom of the Oracle of Omaha,
I think you’d enjoy hearing his timeless advice from 2019.
This year he, among other things,
told us why he has never invested in an IPO.
Cheers guys, see you soon!