Let a Billionaire Manage Your Finances for Free

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.

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29 comments

  1. “he is the second richest man in the US”

    Actually its in the world, but thats only a minor difference.

    He is a really smart guy and whats most amazing is that him and Bill Gates have given away about $60B together, and thats a lot of money.

  2. This is great timing on this post. I am finally making some decent money and want to get started in investing. I have been hesitant though because I am getting killed in the Virtual Stock Market I use online. This seems like a good alternative.

    Could someone please explain or point me in the direction of what it means to buy something on margin? Or hell, even a good book to help me learn about the stock market, as I currently know just about next to nothing.

  3. Buying on margin is basically buying on credit. It’s a loan secured by your stocks that you’re holding in that account. You should probably read more before doing it heavily, but that’s the gist of it.

    Tynan

  4. Good post. I never thought about the idea of buying class B on margin.

    Love Buffett. He’s a great man because he’s terribly modest, humble and simply understands that value is found when companies invest in their workers, maintain a products quality and uphold core shareholder rights. I forget which Wall Street investment house had security fraud problems a few years ago (Smith Barney? Morgan Stanley?), but Buffett was asked to lead the firm’s board to clean up their act. His leadership alone reassured investors and Wall Street to put their trust back into the firm.

    http://en.wikipedia.org/wiki/Warren_Buffett

    Probably the only other company today that meets similar profit margins consistently are Altria (Phillip Morris), 3M (excellent long-term investment) and GE (although last few years have been weaker than normal).

    Happy New Year to all.

  5. Great post — I know you mentioned this to me before.. but this explains it more thoroughly.. Thanks for the tip!

  6. Nice post Tynan.

    I’m into investing too… and buy and hold is definitely the best approach. Investing is easy. Just buy big companies, with decent yields, that are making profits and will do so in the future. Then just hold them. Easy money.

  7. Investing in stocks long term is no less than the Holy Grail of our time. It allows the common man to get rich over time. Using an excel spreadsheet, I find that investing only $100 a paycheck from age 18 to 40, at Warren Buffet’s 23% annual return, will give you an investment worth $1.2 million. Without contributing anymore, you could just retire (at 40) and pull in an astounding $278,000 a year income just from the 23% returns. Or keep working and contributing for another 10 years, and retire at 50 with $9.6 million in your account and earn a mind-blowing $2.2 million a year in interest. For doing nothing! And this is based only on $100 a paycheck. Just imagine $200. (Just double the figures I listed). Math is good. Life is good. Thank you for reminding us, Tynan. (More articles like this about making money, please!)

  8. 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.

  9. Wolfy…what is the formulae for compounding that out in excel to get the value of the “pot” in 22 years? I tried using the automated FV (future value) function and can’t match your result. Cheers, Motown

  10. 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.

  11. Okay so I spent the past couple of days reading about the stock market. Just a quick question to Tynan.

    You said you were going to put all your money in Berkshire stock. Are you worried about diversification at all?

  12. Also for the sake of further discussion…

    Warren Buffet is 76 years old. He is getting up there, what do you think would happen to his company after he passes away? How do you think it will affect the returns?

  13. Not at all. He is super cautious and very well diversified. He also has a large percentage of the money in cash (or equivalent fixed return zero risk investments).

    Basically, if the richest investor in the world has his money in a certain set of stocks, I’m happy to admit that he knows best, and exactly mirror his choices.

  14. I think that it will cause a temporarily dip in Berkshire’s price. I will probably buy many shares on margin at that point. He has secretly named a successor and appears to be very confident that Berkshire will continue to succeed.

  15. Hawt raises a good point. Of course Buffet appears “very confident” that Berkshire will continue to suceed. If he was anything but that would affect Berkshires share price. Isn’t he planning to retire in a fixed number of years? Maybe you could look for other similar companies with simarlaly good track records to diversify?

  16. Start at http://www.motleyfool.com and go from there. There’s thousands of good books and you’re going to have to take the time to sort through what’s relevant and what’s not. One of the best books out there is Random Walk Down Wall Street but it’s more about investment psychology. Former PM Peter Lynch of Fidelity wrote a book several years ago that’s basic and a good primer called One Up On Wall Street. Be careful of books being written by people like Suze Orman, Donald Trump and Jim Cramer. While there my be useful info in their books, the books are written more to support their enterprises, i.e., Suze Orman writes books to support her show on CNBC, etc. My point here is to know the difference between a “media” person and someone who’s a true investor like Buffet or Lynch.

  17. 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

  18. 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.

    Tynan

  19. 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.

  20. 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.

  21. 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.

  22. 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.

    Tynan

  23. 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? =)

  24. 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.

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