Stop Playing Russian Roulette With Your Money

Berkshire will forever remain a financial fortress. In managing, I will make expensive mistakes of  commission and will also miss many opportunities, some of which should have been obvious to me. At times, our stock will tumble as investors flee from equities. But I will never risk getting caught short of cash.

– Warren Buffett (2018 Annual  Letter)

For sometime now, Berkshire Hathaway has been criticized for holding this most cash in the company’s history – a whopping US$111 billion. Until the critics show me their investment track-record, I’m siding with Warren on this one. He goes on to say:

In the years ahead, we hope to move much of our excess liquidity into businesses that Berkshire will permanently own. The immediate prospects for that, however, are not good: Prices are sky-high for businesses possessing decent long-term prospects.

Investors haven’t seen bargain basement prices for a long time now. December did however, provide us with a sneak peek – the market falling 20% peak to trough, officially falling into ‘bear market’ territory (who came up with this magic number anyway?). Alas, it wan’t meant to be, with the market rallying about 15% from it’s lows making it one of the shortest bear markers on record:

Source: Charlie Billelo – Pension Partners

Investors who were waiting for lower prices didn’t see it. Investors who were speculating with their wealth got away with one. The buyers will have their day, as long as they remain patient and disciplined. The speculators will too face their day of reckoning.

Rational people don’t risk what they have and need for what they don’t have and don’t need.

– Warren Buffett

If you’ve been playing Russian roulette – usually win, occasionally die – with your wealth, enjoy the present calm. But understand this, you’re strategy is fundamentally flawed. We will eventually see, and investors will need to contend with a sustained decline in asset prices. When this decline occurs no-one really knows. Whilst we have some harmony in financial markets (if I can call it that), you may want reassess your game plan. Here are 3 tips to consider:

  1. Reassess your tolerance and capacity for risk. How much, and for how long, can you afford to lose money. How would your life be impacted if tomorrow you woke up to find out financial markets had collapsed 10%, and began their treacherous road to falling 60% over a 24 month period? How much of your chip stack have you pushed into the pot? The time to reassess risk is when markets are going up, not down.
  2. Invest with purpose. Why are you making this investment? What is the purpose? How did you arrive to the amount of money you invested? What is the exit strategy? Be clear and specific with your investments. If you can’t answer these questions, you have a flawed game plan.
  3. Diversify. If you’re truly following point number 2, your portfolio should naturally be diversified. If you’re not following point number 2, work on point number 3. Is your portfolio diversified all major asset classes, cash, fixed income, property, shares? Is it diversified within each major asset class – for example, sectors, markets, geographies, currencies? How much cash are you holding for opportunities?

If you haven’t had a chance to read Mr Buffett’s 2018 Annual Letter to shareholders, may I suggest you set aside 10 minutes and download your daily dose of wisdom. You can download it here. It constantly perplexes me why so many investors choose to make the journey of wealth accumulation so difficult for themselves and their families.

I’ll leave you with this passage from Mr Buffett’s 2018 Letter:

Let’s put numbers to that claim: 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.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Invest like the best.

Here’s The Advice From One of The World’s Most Successful Investors

Last week, Charlie Munger, the 95 year old Birkshire Hathaway Chairman and Chairman of the Daily Journal, spoke to shareholders of the newspaper’s annual meeting. In his usual no holds barred manner, he spoke for two hours addressing and answering questions from shareholders.

I watched his address from beginning to end. The man is 95 years of age, he’s one of the smartest minds in investing, and when he speaks, investors stop and listen.

His investment concepts, processes, and beliefs are so simple, which I believe is what makes it so difficult to implement and replicate.

It’s amazing how intelligent it is to spend some time just sitting. A lot of people are way too active.

– Charlie Munger

I’ve taken some of his best responses to questions he was asked in the hope that it would give you insight into, and be valuable in your endeavor to build your financial wealth. If you want to be anywhere near as successful as this man, take his advice. Okay, here we go…

Which money managers would you recommend besides you and Warren?

I’ve only hired one in my lifetime, I don’t think that makes me an expert. Everybody would love to have a money manager that would make him rich. Of course we would all want that. I would like to be able to turn lead into gold. But it’s hard. It’s very hard.

Next question.

How do you know when to exit an investment?

You’re not talking to a great exiter. I’ve been a good picker. Other people know more about exiting. I’m trying never to have to exit. I’m no good at exits. I don’t even like looking for exits. I’m looking for holds.

Think of the pleasure I’ve got from watching Costco march ahead. Such an utter meritocracy and it does so well. Why would I trade that experience for a series of transactions? Firstly I’d be less rich, not more after taxes, and secondly it’s a much less satisfactory life than rooting for people I like and admire. So I say find Costco’s not good exits.

I’m a very patient man, and I know a lot, but I don’t know everything.

Why has apple stock declined over the past 12 months?

I don’t know why Apple stock is going up or down . I know enough about it so I admire the place, but I don’t know enough to have any big opinion about why it’s going up or down recently. Part of our secret is we don’t attempt to know a lot of things.

I have a pile on my desk that solves most of my problems – it’s called the too hard pile. And I just keep shifting things to the too hard pile. And every once in a while an easy decision comes along, and I make it. That’s my system.

In October of 2008,  a month later Lehman fell bankrupt, and in the depths of the abyss. Mr. Buffett famously wrote an editorial saying that he was buying stocks and that he was bullish on America. You’re famous for bottom picking Wells Fargo in March of 2009. What made you decide to buy Wells Fargo in March of 2009, instead of October of 2008?

Well, I had the money at a later period. And the stock was cheaper. Those are two very important parts of the purchase.

If you didn’t have access to Li Lu and to the Chinese exchanges through him like many American’s don’t, would you feel comfortable investing in the American Depository of most Chinese companies that are comprised of a VIA structure, and offer shareholders few rights and minimal protections from the Chinese government?

I don’t know much about depository shares. I tend to be suspicious of all investment products created by professionals and I tend to go where nothing is being hawked aggressively or merchandised oppressively or sold aggressively, so you’re talking about a world which I don’t even enter. So I can’t help you. You’re talking about a territory I avoid.

Do you worry about the large use of derivatives on the balance sheet of banks?

All intelligent investors worry about banks. Because banks present temptations to their managers to do dumb things. There are so many things you easily do in a bank that looks like a cinch way of reporting more earnings soon, where it’s a mistake to do it long-term considerations being properly considered.

As Warren puts it, the trouble with banking is there are more banks than there are good bankers. And he’s right about that. So if you’re going to invest in banks, you have to go in at a time when you’ve got a lot going on for you. Because there’ll be a fair amount of stupidity that creeps into banking.

What level of discount would you be applying to potential investments today?

Generally speaking, I think professional investors have to accept less than they were used to getting under different conditions. Just as an old man expects less out of his sex life than he was 20.

Why is Warren so much richer than you?

Well, he got an earlier start. He’s probably a little smarter, he works harder, there are not a lot of reasons. Why was Albert Einstein poorer than I was?

He finishes his address with the following statement. A statement which I believe more investors should take into consideration when it comes to financial wealth creation.

If you actually figure out how many decisions were made in the history of the Daily Journal Corporation and Birkshire Hathaway, it wasn’t very many per year that were meaningful. It’s a game of being there all the time. And recognizing the rare opportunity when it comes. and recognizing the normal human allotment is to not have very many. Now there’s a very confident bunch of people who sell securities who act as though they’ve got an endless supply of wonderful opportunities. Well, those people are the equivalent of the race track tout – they’re not even respectable. It’s not a good way to live your life – to pretend to know a lot of stuff you don’t know. My advice is avoid those people, but not if you’re running a stock brokerage firm – you need then.

It’s not the right way to make money. And this business of controlling your costs and living simply, that was the secret. Warren and I had tiny bits of money. We always under spent our incomes and we invested, and if you live long enough you end up rich. It’s not very complicated.

Investing is simple, but not easy.

The Cost of Complexity

They say simplicity trumps complexity. I’m a big believer in that statement, especially when it comes to the investment world. The financial world is a big bullshit machine. Our industry is simply trying to sell shit to investors and profiteer during the process. Facades, charades, charlatans, smokes and mirrors is the game. Here one day, gone the next.

I get it. The scarcity. The exclusivity. The complexity. The money. It’s all enticing.

The most recent National Association of College and University Business Officers (NACUBO) Study of Endowments was released a week ago. It’s based on 802 U.S. college and university endowments and affiliated foundations, representing nearly $617 billion in endowment assets.

These are some of the largest, most sophisticated and powerful endowments from around the world. The resources at the finger tips of these institutions are incredible. They have specialist teams dedicated to analysing sectors and stocks – their job is to analyse investments every-single-day. They employ economists and strategists who are some of the brightest people in the finance world. Their investment committees and boards include some of the world’s most highly educated and connected people. These people spend their days meeting money managers and undertaking due diligence on investment opportunities, both locally and globally.

They’ve literally got one job. To make great investment decisions. That’s it.

Here’s how they performed:

Here are some relative indices for comparison:

Here are the funds’ asset allocation:

These funds have not only over-complicated their investment strategy, but they’ve also taken on more risk, yet achieved a lower rate of return. For reference, a Vanguard 10/90 (defensive/risky) portfolio returned 9.70% and 7.10% pa over 5 and 10 years respectively.

The more sophisticated a system and strategy, although it may appear attractive on paper, often fails to bear fruit. Why? The people behind them and their (and your) behavioural errors – buy high, sell low, derails the most seasoned investor. Your IT help desk actually has an acronym for this issue – PEBKAC, or “problem exists between keyboard and chair.”

By understanding our own cognitive biases, we can design an investment portfolio to bypass our behavioural errors. One way is to simplify your investment strategy. Here are a few ways of doing so:

  1. Go passive. Here’s a dirty little secret – stock picking is totally over-rated. Just click here.
  2. Diversify your portfolio (properly) across and within major asset classes.
  3. Keep your investment costs low. If you’re paying more than 0.50% pa., you’re paying too much. It’s like taking an Uber-Black when an Uber-X would have got you to the same place, in the same time, but would have cost you (at least) half the price.
  4. Re-balance your portfolio – annually is ideal for a variety of reasons, which I won’t bore you with here.

Investors spend far too much time and money trying to beat the market. When in fact they should be trying to make sure the market doesn’t beat them.

Tidying Up with Robert Baharian

I’m so excited, because I love…mess!

That’s Marie Konda from the latest Netflix series, Tidying Up with Marie Kondo. In a series of inspiring home makeovers, world-renowned tidying expert Marie Kondo helps clients clear out the clutter – and choose joy.

For some reason, we have so much stuff…

Kondo has designed the KonMari Method – a unique Japanese method whereby she organises by category rather than location, and tidies five categories in a specific order:

  1. Clothing
  2. Books
  3. Paper
  4. Komono (kitchen, bathroom, garage, miscellaneous)
  5. Sentimental items

We feel stressed at home, because of the clutter.

Kondo and I have one thing in common. We both love mess! Well, Kondo loves messy homes and I love messy financial lives.

It’s kinda hard to let it go, because I really like this one…(crying)

Inspired by Kondo, I’ve designed the RobBahari Method – a unique Armenian method of organizing your wealth by category rather than investment, which I’ve broken down into five specific categories:

1. Security

This is the no to low risk stuff – from cash, term deposits, to government and corporate bonds. This bucket provides you with certainty in your life, and it’s the bucket you should keep the part of your wealth you cannot afford to lose.

2. Growth

This is the engine room of your financial wealth. And one that you need to take a long-term view on. Anything less than 10 years and you’re speculating – simple. This bucket includes your share portfolio, real estate, land, collectibles, etc.

3. Cashflow

This is the bucket that helps you live your life – clearly a very important bucket. This bucket may include items from the Security and Growth bucket too. Primarily this bucket includes your salary, shareholder drawings/business income, property developments, business ventures, etc.

4. Lifestyle

Life is about more than just money, and this buckets includes just that. Your family home, the beach house, the sports car, that nice piece of jewellery.

But hey, just because it’s lifestyle, it doesn’t mean it can’t be an investment either.

5. Contribution

They say the secret to living is giving. It’s taken me a little while, but I’m a big believer in that. The more you give to others, the happier you’ll be, and the more you have, the more you can give.

My beautiful wife has taught me that having a scarcity mentality of money is what will prevent you from being wealthy. If you don’t give away money when you have $100, then you won’t give it away when you have $1m. And it’s not just about giving away your money – that’s easy. It’s more about your time, your efforts, your ideas, your advice, your attention, your love, and your presence.

Far too many individuals and families go by each day without a strategy, without a game plan. In fact, far too many individuals and families are not clear on their goals and priorities. I ask you to challenge yourself…

  1. What are you working towards and why?
  2. What does money mean to you and why?
  3. What does wealthy mean to you and why?

I’ll leave you with this quote from Marie Kondo:

Keep only things that speak to your heart.