During my second year at college, I thought that investing was easy. I read about options, paper traded for a few months, and then solicited my friends for investments. Many of them invested in my hedge fund - "The H Fund", which I started with a friend. In total we had $26k, which was quite a lot considering how young we were.
The fund survived for a few months, even being profitable for a short amount of time. In the end, though, we lost all of the money. Luckily I have awesome friends who understood the risk, and no one was mad. Still - I learned my lessons and stayed out of the stock market for years.
For some reason or another I started reading about Warren Buffet. For those that don't know, he is the second richest man in the US, with a worth of over 40 billion. What makes him exceptional is that he is the only person on the top 100 richest people list who made his money through investing.
Facing that fact, it's safe to assume that neither you, nor any of your friends are better investors than Warren Buffet. I like to think that I could do anything, but there is no way I would be willing to put in the time necessary to become better than WB, if that's even possible. If I'm not going to be the best investor in the world, the next best choice is to have the best manage my money. Luckily that IS possible.
In 1965 Warren Buffet took over a company called Berkshire Hathaway, a textile company. He soon turned it into a holding company and used it to buy stocks and whole companies. It was made into a public company, enabling anyone to invest and mirror his returns. Since 1965, Buffet has averaged a 23%+ annual return. The market indexes have averaged around 11% over that same period, and have been far more volatile. In fact, Berkshire Hathway has only had one losing year since inception, with only a 6% loss.
After doing more research, I realized that there is no better way to manage my money than to put it all in Berkshire Hathaway. I've watched interviews with Buffet, read books, and read his annual shareholder addresses. His number one goal is to not lose money, with his secondary goal being to make great returns. With a track record better than any other investor in the world, it's an easy choice.
Berkshire Hathaway is broken up into two types of shares, class A and class B. Class A have never split, and thus are worth over $110,000. This isn't practical for all investors, so they created Class B shares which are worth around $3600. Both shares increase or decrease by the same percentage, so it's fine to just buy B. You don't get voting rights with them, but your vote doesn't matter anyway.
Here's how I do it. I deposited $4000 in my account to start off. I bought two shares of Berkshire Hathaway - one outright and one on margin. Margin costs 10% per year, but Berkshire Hathway averages 23%, so I'm not concerned. Every time I get paid from work or sell something I put 20% of it in my account, which decreases my margin exposure. Once I own that margin share outright, I buy another one on margin.
Disclaimer : Since I own stock in Berkshire Hathaway, I theoretically benefit from you buying shares as well. This has nothing to do with why I recommend it, since that benefit is totally insignificant, and I don't plan on selling my shares for many many years.
FOOLISH advice and terrible investment philosophy. This is novice at best and I would say 'safe' except for the use of margin.
Past results are not an indicator of future returns. Don't use margin unless you are an experienced investor and have educated yourself. As a former investment banker and trader (I've traded and learned from some of the best traders-including for BERK-on the floors of the CBOE and NYSE), I urge you to thoroughly educate yourself first before taking investment advice from this blog.
If you like WB Value investment philosophy look into diversifying in other quality value investment management firms. I personally love 'Value' and it offers the most value to me and my lifestyle. There aren't too many great ones (that aren't already closed to new investors), but two excellent firms off the top of my head are Century Management Parners (ironically Austin based) and Brandes Investment Partners out of La Jolla, CA. Both are impecable with superior returns. I've met both of the firms personally and they have similar Value investing philosophies to WB (Brandes is known for international holdings-Read Charles Brandes' book). By my professional definition, "Value" mean the holdings should be 30-50% below book value when purchased by the portfolio manager.
Ty, stick to just being awesome. Cheers mate.
Motown, I actually wasn't using the FV function to get my figures, but the FV formula would be: =FV(23%, 23, -2400)
In case anyone wants to know: "23%" is the interest rate, "23" is the number of years (from age 18-40), and "2400" is the amount contributed per year ($100 a paycheck times 24 paychecks a year). From that I get the answer of $1,209,399.88
And then applying 23% to that total gives the $278,161.97 per year amount you'd be earning if you just wanted to take the profits every year and spend it.
Yeah... it is good. Regular investing... easy money.
You'll be lucky to reach 23% though. The index average of the FTSE is about 11%... I think the DOW is roughly the same.
Even Buffet himself thinks that the 20th century and now is the 'golden age' for capitalism and there might be tough times ahead. Still, an 11 or 12% rise each and every year will still make you rich.
Cautions: in the year 2000 after huge gains in the previous 17 years of the entire stock market, Warren Buffet was asked to predict what he expected stock market returns to be over the next 17 years. His answer was 4%
Between the years 2000 and 2005 the total return on Berkshire Hathaway was 0, that's right , zero.
More than half of Berkshire hathaway is in 2 insurance companies, GEICO (the gecko auto insurance company) and General RE, a reinsurance company.
I like Berkshire Hathaway very much. His business purchases are based on cash flow of the business. His annual reports in the past have given his 4 principles for buying a business (or a stock):
1. honest competent management
2. Long term favorable prospects (buying brands with pricing power)
3. Understandable businesses(cash flow, no technology that can go out of date)
4. He only buys at a good price based on cash flow.
The financial company he became a director for was Salomon Brothers, and he owned most of the company. He joined the board after the company illegally tried to gain a monopoly on Treasury bonds sales and almost wrecked the world's economy.
That is an excellent idea! I think I might purchase a share and attend.
Personally, I also sleep well with my money invested in Vanguard index funds. The great majority of managed funds can't beat the market... if you can't beat it, why not be it? =)
My only argument is that Warren Buffet probably knows best, and all of his money is in Berkshire. Past performance is an indicator of future performance, just not the only indicator. It's like saying that Tiger Woods might become a bad golfer. It's possible, but doubtful because of his past performance. Same with WB.
As for margin, it's not that complicated. It's a secured loan with 10% interest. At any given time I have a fraction of a share on margin (averaging 50% of a share, of course). Because Berkshire has such huge cash reserves, it would be virtually impossible for the stock price to hit 50% and thus trigger a margin call.
I will checkout those two firms you mentioned, but for now I'm happy with Berkshire.
A couple of things - I own a single share of BRK-B. My motivation for buying it was to one day take advantage of the shareholder privilege to attend the annual meeting in Omaha. Unfortunately, that has conflicted with my final exams for the past several years. However, I should be done with school in 2008, and might attend then. I have seen Buffett speak and highly recommend it if you ever have the opportunity.
I know that BRK owns a lot of different companies (and a large horde of cash, which is kind of like owning bonds), but personally, I sleep better at night having the bulk of my long-term investments in low-cost mutual funds from Fidelity and Vanguard.
You put it plain and simple, thanks for the tip. B shares are going for about 6 g's right about now. When I get my weight up, Im in.
A few things - At most I have one share on margin, at as I build up cash in the account I have just a tiny bit on margin.
He has pledged 5% of his shares yearly to Bill Gates' foundation.
It's not a perfect investment, but it's as close as possible.
I was really excited when I read your post about this, since I too have been looking for something to invest my money in. When I started looking more closely at the stock performance since it went public in Jan 1990, I was somewhat disappointed. The stock did perform exceptionally well until mid-1998, at an average annual return over that period of about 31%! And while that's great even for the dot-com growth period, we do have to keep in mind that it was, after all, the dot-com growth period, and almost all stocks were doing great then. The stock then lost about 40% of its value over a period of almost 2 years, and since then (early 2000) until now it has had an average annual growth rate of about 15%. Over the whole history of the stock being public, it has averaged about 17% annually.
My point of all this is that I think it's unrealistic to think the stock will perform at 23%, and certainly not on a consistent basis. The natural of all stocks is to be volitile, and if you look at the history of the stock, while it certainly has risen over time, it's had down periods as well. I think it's fair to differentiate the private period from the public period. If it has grown at an average of 23% since he took it over, and at 17% since it went public, it grew at more than that from the time he took it over till it went public.
Ty, considering the stock's performance since it's gone public, you might want to reconsider your strategy of always owning one share on margin. If you take 10% out of the numbers I quoted above, that's a big chunk.
Another thing to consider, is that hasn't Buffet pledged almost all of his fortune to Bill Gates' charity? I'm assuming Buffet owns a serious percentage of the total of Berkshire Hathaway. I'm not sure what happens after the money is gifted to the charity -- whether it holds it as stock or sells it off, but that could also add some uncertainty to the equation, if a decent amount of Berkshire's stock is going to be sold off over the next few years.
I'm concerned about Buffet's age as well, and am not quite as optimistic as Ty is.
Anyway, I would recommend for everyone to check out the stock using Yahoo's great new stock tool! The best part is you can drag it graphically (on the bottom right, where it says "time range") to see the performance at various points in time:
Its ticker symbols are BRK-A and BRK-B
If any one thing defines me, besides supreme awesomeness and authentic gangsta flavor, I'd say that it's my materialistic bent. The fact of the matter is that I usually love buying things. I love finding the best deals, I love buying the best of things (yeah, sorry... had to put that project on hold for a minute). There have been weeks where I've gotten a package every single day. Check part of my intro in the game :
In his spare time - which was basically all his time - he explored caves, recorded extremely catchy rap songs, and surfed the Internet for unusual items to buy and then never use.
It's true too. I have a $500 fountain pen. I don't even handwrite anything ever. I have three japanese LED watches, one watch with a GPS, another that tracks my sleep patterns, another that monitors my heart, and I don't wear a watch. I have the best toaster in the world (Dualit), the same one the queen uses. I use that a few times a year.
Oh, here's something that I could use some advice on: after I get paid, I'll probably have around 3K USD in a bank account doing pretty much nothing. Should I invest it in a Vanguard index fund or something similar for now? Also, I'm probably going to need to buy a car eventually (my guess is in 2-3 years), which can create a lot of nasty compounded interest. Would I want to use any money that I have saved up to pay a big expense like that off immediately, or would I want to keep some invested?
If you've only got $3k you want to keep most of that liquid as an emergency fund. You probably don't want to buy stocks unless you can go long on the stocks and ignore market movements, and you want to study investing before investing ESPECIALLY investor psychology so you don't panic and act rashly if (when) there's a crash. You probably want to read "The Intelligent Investor" by Ben Graham before buying any equities, which Warren Buffet says is the best book on finance ever written. I agree, btw - I've never found better. Excellent book.
If you did want to deploy some of your cash, here's a couple things:
*It'll cost you around $20 to $100 to develop a credit score, assuming you're American and don't have one. Go to the bank, throw $100 in a CD, and get a secured loan against it that reports on your credit. That'll give you a revolving line of credit on your credit history, which helps. Get a credit card a few months after that, and ALWAYS pay it off in full each month. Good credit will make/save you thousands later, so do it now.
*Buy small gifts for people you admire as a show of respect. Do this for particularly good professors, bosses, teachers, friends of family, acquaintances, etc. Go $20 to $100 per gift to start, $100 is even too high unless someone has been really great to you. Buying 50 gifts at $20 each for people who have treated you REALLY well probably pays for itself. Write a note of gratitude when you do it, just buy chocolate or protein bars or a great DVD or something small. Don't do it all at once, spread it out, but I've never regretted spending money to say thanks for someone who helped me.