We Anonymously Surveyed Our Clients. Here’s What They Said.

To say the wealth management industry is crowded is an understatement. In Australia there are more than 25,000 registered financial advisers, and we all claim to be the best. In an industry that is also dominated by males, in fact almost 80%, it wouldn’t be out of school to say we’re a little egotistic, and probably driven by a need to feel significant. Most of us think we know what our clients want, without thinking to ask them. We engage specialist consultants and marketers to tell us what our clients think and want, when our clients are one email and phone call away – and they’re willing to help because it benefits them directly.

In can be daunting to face the truth, but in the pursuit of improving our offering to our clients, we decided to survey them, anonymously. Here are the top 3 things we found. The aqua colour bars are the results for BWM, and the green bars are the results of all firms participating in the study (nation wide).

The question, the results…

What we learned…

Most investors believe an adviser’s value proposition is in their investment returns. Nothing could be further from the truth. The reality is that there is more to what we do than just make money. Our clients measure our value by their ability to achieve their goals. Whether it’s to travel, to educate their children, to contribute back to their community, there is always a deeper purpose and ‘why’ to money. Uncovering this, putting in place a game plan to help achieve their objectives, whilst giving them a sense of security and peace of mind that they are on track is paramount to our clients.

The question, the results…

What we learned…

Investments and goals are joined at the hip. The money is simply a means to an end. It’s an enabler. It provides our clients with choice, flexibility, and freedom to do the things that are most important to them. As such, investment decisions need to be made through the lens of their goals. Each investment is made with a specific purpose of helping our clients achieve their objectives. Making money, in isolation, is not the objective, there is always something deeper. Once we understand this, once we have clarity of this, investment decisions become much easier to make. Make money, don’t let money make you.

The question, the results…

What we learned…

Everyone, and every family is unique. Our clients seek a bespoke experience – one that is customized to them. It validates our decision to serve a select group of people, and serve them well.

We we’re overwhelmed by the response rate of our clients and their kind words, however in the pursuit of doing more and better for our clients we sought real feedback. In the end, we ended up with a Net Promoter Score (NSP) of 54 (a score of greater than 0 is generally deemed good, and a score of +50 is deemed excellent), something we’re truly proud of, and validates the honest, hard work we do for our clients – more to come in this space, and we’re excited!

In summary, it’s our relationshiprange of servicesour experience with clients like them, and having a sense of security and peace of mind that our clients find most important in our relationship. Thank you to a bunch of great people – our clients, our friends, who have supported us through the last 3 years – we are truly honored that we can serve you in this way.

If you want to know more about BWM, you can check us out here.

Godspeed.

Your Brain Doesn’t Want You To Invest In The Stock Market – Here’s Why

Last week my wife and I spent a beautiful evening at the Peninsula Hot Springs. Although my favourite pool was the 38°-40° She Oak Barrel Bath, the Cold Plunge Pool intrigued me the most. Was it the uncertainty? Was it the challenge facing me? Whatever it was, I wanted to jump in.

Jumping into the unknown can make anyone nervous. It reminded me of the stock market. Sure, the She Oak Barrel Bath was warm, comfortable, and I knew what to expect. The Cold Plunge Pool on the other hand, uncertainty awaited me.

The human brain is millions of years old. It’s not designed to make you happy, it’s designed to make you survive, so it’s always looking for what’s wrong in a situation so you either fight it or flight from it.

We all know the stock market can crash at any time, and your brain will over-estimate this probability every day of the week – making even the most seasoned investors make questionable decisions.

Whilst it’s true, jumping into the stock market is never easy, yet the track record of the stock market is undeniable – a consistent performer over the long long. Although the stock market has trended upwards over time, investors experience negative returns around 31% of the time.

When looked at over short periods of time, the stock market can be extremely volatile. In fact, the stock market has lost between 30% and 40% in five different years (1917, 1931, 1937, 1974, and 2008), whilst it has gained more than 50%  twice (1933 and 1954), as see in the distribution chart below:

These wild swings begin to reduce the longer our time horizon. Consider the below animation, which looks at 1, 5, 10, and 20 year rolling periods. Take a look at the 1 year horizon, we see the best return of 53.20%, worst return of -37%, and volatility (ups and downs) of 18.20% – lots of red lines (losses).

Consider 5 year rolling periods. The best return was 28.50%, worst return was -11.70%, and volatility of 7.10% – much less red lines (losses) when looking at your investment over a 5 year period.

Consider 10 year rolling periods/returns. The best return was 17.60%, worst return was -4.10%, and volatility of 5.10% – only a handful of losses (red lines). Finally, consider 20 year rolling returns. The best return was 13.20%, the worst return was 0.50% (yes, a positive number), and volatility of 3%.

The longer the time frame, the less red you see. In other words, the stock market has not lost any money over a 20 year period.

No different to the Cold Plunge Pool, if you’re looking to jump into the stock market for a quick dip, you’re likely to have a poor experience. If however, you’re patient, resilient, and have the courage to brave the initial shock to the system, you will have a far more enjoyable and rewarding experience.

The stock market is a device for transferring money from the impatient to the patient

Warren Buffett

Source: The Measure of a Plan

You Just Got Ripped Off. Again

Your kids are in your year, blaming you for destroying the planet. You want to do your part for the planet. You’ve watched Craig Reucassel’s War on Waste Documentary, and you want to reward companies doing the right thing. You’re now far more conscious of environmental, social, and governance factors when thinking about your investments.

You’re in luck. A new Australian Sustainable Share Fund has been launched. And it’s raised over half a billion dollars within months. Not only is your money working for you, but you can now tell your 21 year old that you’re doing your bit for the planet. Here’s where your fairy tale comes to an end. The fund you just invested in has two filters, 1) the exclusion of tobacco, and 2) the exclusion of controversial weapons. Can you tell me how many companies on the Australian stock market are involved in tobacco or in controversial weapons? You just got ripped off, again. Sustainable investing is far more than that.

There’s more to than just dumping your money into a so called ‘sustainable fund’ and feeling like you’ve done your bit. We have a choice not only as investors, but as consumers and citizens.

UBS surveyed 5,300 people in 10 markets around the world, and they found that 65% of people say they want to create a better planet, yet only 39% say they have sustainable investments.

Sure, it’s confusing. The jargon, the marketing, how do even judge the impact you’re making, and do they even perform well? Let’s take a look.

What is ESG?

The “E” – Here are some things to consider

The “S” – Here are some things to consider

The “G” – Here are some things to consider

How do they perform?

Applying the right ESG filters to your investing and portfolio does not mean you must give up good returns. Here’s market returns versus the market excluding specific sectors (US) since 1975. We’ve used the US because of it’s long data history. The numbers are very similar to other markets around the world. As you can see from the table below, the returns are very similar to each other.

Some common questions:

Should I exclude all miners?

When it comes to any type of investing, you need to maintain a level of diversification so that you don’t take anymore risk than you need to. In any case, not all miners have bad environmental records. Especially as we transition from fossil fuels, you want to encourage and reward the good ones.

Why shouldn’t I just throw out the bad ones and buy all the good ones?

Choice is an investors friend. You need to maximise your investment universe so you have more choice. Some so called “good” companies aren’t that good, and so called “bad” companies, aren’t so bad. Reward the companies that are moving in the right direction, even if they’re in a “bad” industry.

What are the costs of pursuing a sustainable investment strategy?

The more of something you do (trade, filter), the more it will cost you and the less diversification you will gain. Having said this, it is not significant, and in fact, the returns ad diversification are very similar to what you would otherwise receive.

Here’s how you may want to approach sustainable investing

As investors, you can feel satisfied that your investments match your personal values. You can make an impact on social and environment issues. You can target higher expected returns. And you can reach your financial goals without taking on more risk than is necessary. Just don’t get caught up in the marketing of all of this. You deserve better.

And please don’t feel as though your impact is limited by your investment choices. The decisions you make every day as a human being has an impact. From what you buy, where you buy it from, how you commute, to what you eat, make’s a difference.

This is my first time at Davos and I find it quite a bewildering experience to be honest, I mean, 1,500 private jets flown in to hear David Attenborough speak about how we’re wrecking the planet.

– Rutger Bregman (Dutch historian)

Source: ABC, Dimensional Fund Advisers

Here’s How The Stock Market Can Make or Break Your Retirement

The stock market doesn’t care for what you want or need. It’s a cold and heartless beast – I know, it’s unfair.

Some things don’t make me happy to say, but there is a lottery aspect to all of this: when you were born, when you retire, and when your children go to college. And you have no control over that.

Jack Bogle

The lottery that Mr Bogle is referring to is the luck of the draw: What will the financial markets be doing when you retire? If you retired in the early 2000’s, you we’re ‘in luck’. If you retired in 2007, you were ‘out of luck’.

One of the biggest risks that isn’t spoken about in the financial world, is sequencing risk. Although it may sound complicated, it’s probably one of the most simplest, yet underrated risks. The risk that you suffer investment losses early in your retirement years, which is a matter of luck, your odds of making it over the long run fade very quickly. In essence, the earliest years of your retirement will define your later years.

Don’t believe me? Let’s take a look at two retirees, David and Carol.

David, age 65, has accumulated $1,000,000 and is about to retire. His portfolio is invested in line with a ‘balanced’ portfolio, that is 60% in stocks, and 40% in bonds. David draws $50,000 (indexed by 3% each year) from his portfolio each year to help fund his retirement.

David

David experiences some losses early on in his retirement – three years in a row in fact. And within five years, his portfolio has been cut in half. Withdrawing funds when the market is down makes it even worse. Although David’s portfolio makes up ground in the following years, the damage has been done. By the time he reaches 85 years of age, his portfolio has collapsed. he withdrew a total of $1,255,843 from his original investment of $1,000,000.

Carol

Let’s now consider Carol. Carol also retires at the age of 65 with $1,000,000 in the kitty. Carol experiences the exact same market returns as David, however in reverse order. Here’s what her portfolio looks like:

By simply reversing the order, or sequence of returns, Carol has a vastly different retirement experience. In fact, by the time she is 88 years of age, she has withdrawn $1,721,323 and still has over $2,485,000 in her retirement portfolio.

It’s mind boggling. Two retirees with the same investment balance, same withdrawal rate, same investment time frame, same average returns. Yet one penniless, the other living a completely financial free retirement.

You can do all the things right, but if you, just for one second, need to start drawing on your funds when the market is spiraling out of control, there can be a devastating impact on your nest egg. For some, this may mean not being able to care for their loved ones, or fund the retirement they’ve always dreamed of. For others, it means not being able to send their grandchildren to an independent school.

The market doesn’t care for what you want or need. For this reason, your personal life and balance sheet have never needed to be been more connected. Be clear on what you want and why. Then make investment decisions accordingly.

It certainly helps when you have a life and financial plan mapped out. Sure, it’s unlikely to go to plan, but like every pilot has a route mapped to their destination, and when the whether changes, they know exactly where they need to go, how far they deviated, and what to do to get back on track.

Sequencing risk is real. And investors deserve risk management strategies that will help give them the financial freedom they deserve.

The Greatest Bubble In History

It was 170 years ago when Scottish journalist, Charles Mackay noted:

We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.

When people think about really, really ridiculous bubbles, the Dutch Tulip bubble of 1636 instantly should come to mind. It’s generally considered the first recorded speculative bubble.

Source: Wikipedia (click for larger image)

How did people even get excited about tulip bulbs!?

Tulips came completely out of nowhere, having been imported from Turkey in 1554. The tulip was different from every other flower known to Europe at that time, with a saturated intense petal color that no other plant had. They blew everyone’s mind, and ownership of them became a major status symbol for the elites.

As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market. Soon after, the Dutch created a type of formal futures market where contracts to buy bulbs at the end of the season were bought and sold. The Dutch described tulip contract trading as windhandel (literally “wind trade”), because no bulbs were actually changing hands.

By 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings and cheese. The price of tulips skyrocketed because of speculation in tulip futures among people who never saw the bulbs. Many men made and lost fortunes overnight.

People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. Such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, and buyers refused to show up to routine bulb auctions, the demand for tulips collapsed, and prices plummeted—the speculative bubble burst. Some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid.

Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.

– Charles Mackay

The ensuing rapid ascent of tulips became the very definition of the ‘greater fool’ theory in action.

Whether it’s tulips, property, stocks, weed, Beanie Babies, or Bitcoin (crypto), bubbles have been growing and popping for centuries, as far back as 1637 in the case of Tulip Mania. Since then, mainstream media has had a terrible track record of identifying bubbles accurately, and in real time. In fact, it’s probably quite the opposite.

Will we see another bubble in financial markets? Sure we will – I guess we won’t know it was a bubble until after it’s popped. Here are some of the greatest bubbles in financial history and their relative magnitude to each other.

Financial bubbles completely change the way certain investors approach financial markets and investing. I also believe some investors forget the main lessons of financial bubbles far too quickly.

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.

– Charles Mackay

Here are four tips to avoid a bubble:

  1. Don’t mind missing the party. The music always sounds good, until the police raid the joint. If something feels wrong, don’t join in just because it looks like everyone else is having fun.
  2. Focus on your objectives. Don’t get sucked into playing someone else’s game. If you focus on investing to meet your needs and circumstances, you will be less inclined to follow the crowd.
  3. Diversify. It is one of the most basic of investment principles, but one that people abandon too readily. If you spread your investments out sufficiently, you will minimize the impact of any one bubble bursting.
  4. Have an exit strategy. When you buy something, have a predetermined exit strategy. That way, if you are fortunate to see your investment go up, you won’t get drawn into holding on just because it seems to be getting more popular.
  5. Rebalance. This will help you execute tactics 3 and 4: As individual investments or asset classes rise, periodically trim them back to keep them in line with your planned mix. That way, a bubble won’t inflate an investment to the point at which it has an oversized impact on your portfolio.

Don’t say I didn’t warn you.

Source: Business Insider, Wikipedia, Forbes

Jack Ma’s Guide To Sanity And Success

There are no experts of tomorrow, only of yesterday.

– Jack Ma

In 1999, Jack Ma co-founded what would become a multinational behemoth specialising in e-commerce, retail, internet and technology – Alibaba.

He’s someone I’ve been following for the last couple of years. His wisdom and simple, yet powerful advice is invaluable. One of my favourite video’s is Jack Ma’s original sales pitch to 17 of his friends is his apartment introducing Alibaba, where he lay out his plan to compete with US internet titans.

In his pitch you gain glimpses of his long-term thinking, his vision, his hunger, his determination, and his work ethic. Most importantly you gain insight into his mindset. If you haven’t seen the video, here it is:

In his video he talks about the tech bubble, the fact that stocks will rise and fall, and that they need to pay a painful price in 3-5 years, yet it is the only way they will succeed – and oh how right he was.

20 years on, Jack Ma is sharper than ever. He recently presented at the World Economic Forum in Davos to pass on his advice to young entrepreneurs. Here are his top quotes:

1.

“Of course I was scared and had doubts [when I started Alibaba]. But I believed someone, if not us, would win. There are no experts of tomorrow, only of yesterday.”

2.

“In business, never worry about competition, never worry about the pressure. If you worry about pressure, don’t be a businessman … If you create value, there is opportunity. Today the whole world worries. That means there is great opportunity.”

3.

“Your first job is your most important. Not necessarily a company that has a great name but you should find a good boss that can teach you how to be a human being, how to do things properly, and stay there. Give yourself a promise: I will stay there for three years.”

4.

“How can we teach kids to be more creative and do things that machines cannot do? Machines have chips, but human beings have hearts … Education should move in this direction.”

5.

What keeps Jack Ma awake at night? “Nothing! If I don’t sleep well, the problem will still be there. If I sleep, I have a better chance to fight it.”

6.

“To manage smart people you have to use culture, the value system, they believe what they do. If you just want to use rules and laws and documents to control – that’s how you control stupid people.”

7.

“When I hire people, I hire the people who are smarter than I am. People who four, five years later could be my boss. I like people who are positive and who never give up.”

Whether you’re setting up a business, or setting up your family’s wealth, having a vision, being hungry for success, being determined, having the right work ethic, and most importantly having the right mindset is paramount. I believe there are 3 key steps in getting what you want:

  1. Know your outcome – be clear on what you want
  2. Know why you want it – purpose provides drive
  3. Take action – stop talking about shit and start doing shit

Take these three actions, and you’re ahead of 95% of the population. It’s a fact.

Source: WEF, YouTube

Stocks & Storytelling

It’s 1994. Iomega (presently Lenovo) is expected to release a product that will revolutionize the PC and storage world. The product is the zip drive – a floppy disk storage system. Like the one in the picture below…you know, the one that’s sitting next to your computer (NOT!).

The stock was hot. It began with a whisper, then to web forums, and eventually to Wall Street who were touting the stock to anyone that was breathing. The story was spreading and it was on fire. People who lived near the company’s factory in Utah, would drive by the factory on a Sunday to see how crowded the employee car park was. And if it was full, the story was, the company can’t meet demand – keep buying the stock! The stock gained 2,135% in one year. Eventually CD-Roms and USB drives killed the Zip Drive, and the company.

Story-telling. Once upon a time, investing began this way. Once the portfolio was built, data was used to market it – we like ABC Company because <insert reason here>, and we expect earnings to surprise to the upside. There was no evidence behind the decision making. It was a gut-feel. A hunch. A story. Eventually, investment professionals realised this game wouldn’t last forever. The narrative changed from telling stories about individual companies to telling stories about investment themes and managed funds – we like Europe because <insert story here> and ABC manager has a strong track record in this space, we expect strong upside from here.

These statements would imply anecdotal insight into the future of a company, region, fund, and ultimately, it’s stock/s.

A lot has changed over the last 25 years. Today, portfolios are constructed very differently. They are constructed using math, data and evidence. And story telling is used to market them. Unlike 25 years ago, the story would sell the stock, and if the data was compelling (after the fact), it would be used to market the stock/manager.

Some money managers still operate like its 1994. Other than a very small handful of managers, most are not very good at it (managing money). The difficulty for end investors and investment professionals selling these portfolios of stocks, is that investors can only identify the winners after the fact, which is of no use to anyone.

Here’s the latest (Australian) data showing the percentage of funds that under performed their benchmark.

Source: SPIVA

The numbers are quite staggering. This is not an Australian phenomenon, the numbers are similar all around the world. Click here if you want to see the rest.

So who should care? Every investor who sometimes confuses brains with bullshit stories should care. Investors should ensure their portfolios are built using evidence and data, not gut-feels and hunches.

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.