Picking Warren Buffett's Brain: Notes from a Novice

The richest man in the world — $62 billion and counting. (Photo: CBS/AP)

“Excuse me. Where is the most difficult to reach microphone?”

I was out of breath from running up the steps but had managed to find one of the microphone stands, manned by two headset-wearing volunteers.

More than 10,000 people had waited on the sidewalks overnight to be first in the doors of the Berkshire Hathaway annual shareholder meeting, and I had made a choice: I would go for the mics instead of the front row.

Given a choice of shaking Warren Buffett’s hand for a five-second photo op or asking him a question, I opted for the latter, and in ten seconds, I’d be sprinting to the corner of the top floor. After all, lunch with Buffett once auctioned off for $620,100, and I’d planned it all out.

These are my notes on what happened and what I learned…

“Can you please radio ahead to put my name on their list until I get there to confirm?” I pleaded, explaining that this was the main reason I had traveled from SF all the way to Omaha, Nebraska.

They smiled: “Sure thing.”

There were 13 mics total and time for approximately six questions from each, for a total of 78 people out of the 31,000 who now packed the Qwest Convention Center like a rock concert. I ended up, only 10 minutes after the doors had opened, number 5 at mic #6. When the spotlight swung over to blind me a few minutes before the lunch break, I was ready to consult the Oracle.

“Good afternoon, Mr. Buffett and Mr. Munger…” my voice boomed out through the sound system with a half-second delay, making it almost impossible to remember my lines, memorized word-for-word. I continued:

“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

[Postscript: Be sure to see some of the great reader answers to this question in the comments after this post.]

An MBA in a Weekend

As several veterans put it to me before the pilgrimage, “it’s like an MBA in a weekend.” I thought this was hyperbole and hero worship, but I would now take it further: I think it’s one weekend that delivers more than most MBAs. Real-world strategies culled from experience? Check. Networking? Big-time check. The only thing the mecca of Buffett seemed to lack was the $100K+ price tag.

Here are my non-linear notes from my exchange with Buffett (B) and Munger (M), as well as the rest of my first Berkshire Hathaway (BH) experience, including conversations in the hallways with some incredible portfolio company managers. Treat each line as a separate observation except for the answers following bolded questions.

Their continued answer to my question:

“…Put it all in a low-cost index fund like a Vanguard 500.” M: “Professionals take croupier profits out of the system. No one will give you this advice [index funds] because no one gets paid for it.” M: “The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity.” B: “There are situations, for the full-time investor, where it’d be a mistake not to invest 50% of your net worth in one business.” If more aggressive: small stocks and specialized bonds, but no currencies.

Best books to read for investing and life?

(B) Chapters 8 and 20 in The Intelligent Investor. (M) Anything by Ben Franklin.

Use the market to serve you, not to instruct you.

What’s being taught in current MBA programs that shouldn’t be?

Option pricing, etc. There are only three courses you need: how to value a business, how to think about market fluctuations, and how to communicate well. There is a great desire of the priesthood [in this case, academics] to teach what they know vs. what you need. If you know the bible in four languages, your ego won’t allow you to teach the true essentials, which might be “follow the 10 commandments.”

From CFO of portfolio company on how to select a money manager. Ask: What is your process? How do you make decisions? Given what you’re holding now vs. 3 years ago, can you share an example along those lines? Are you registered with the SEC?

From same CFO: having a short-term focus (2-4 months) or long-term (7 years or so) is good, but intermediate-term is bad (1-2 years). Everyone is looking at information for 1-2 years due to capital gains treatment. Given that I’d be comfortable with a 10% loss in a given year but not 20%, a 55/45 stocks/bonds split with 7-year objectives would be one potential allocation.

Conventional dogma among economists: the stock market is 6 months ahead of the respective economy.

B: “Envy is the worst of the 7 sins. You feel worse and they feel no worse. Gluttony, at least, has some upside.” [said as he opens another box of See’s chocolates]

The letter and goodies waiting in my hotel room upon arriving in Omaha.

Select money market accounts with comparable returns to CD have advantage: can invest in crashed S&P same-day.

B and M have never discussed timing the market, and if they could, they would focus exclusively on S&P 500 futures.

Look for attractively priced businesses, not stocks. Could you remain confident in your choice, in their durable competitive advantage, even if the market were to close for a few years? Imagine that you have a card with room for 20 hole punches, and you can only invest in 20 companies your entire life.

Worry about getting ahead, not galloping ahead.

Purchasing businesses that earn revenue in British Pound Sterling, Euros, or Francs is OK, as those currencies are unlikely to decline vs. $ USD. $ USD will continue to weaken vs. others.

B and M’s job is to retain — not recruit — good managers once they choose an attractive business to purchase. Good management is part of the evaluation of intrinsic value. Chief characteristics: passion, excellent communication skills, and the tendency to always do more than fair share.

If you want to buy or sell a stock, buy or sell it instead of speculating on futures. If you make a call for a cheaper price, the movement will come earlier 4 out of 5 times.

M on charities/nonprofits: if you donate to a group with strong political leanings, you tend to make lots of dumb charitable gifts.

B: Most things I want do not come from the expenditure of money. I have what I need. We do virtually nothing we don’t want to do. Associating with wonderful people is about as good as it gets. Never trade reputation for money.

Berkshire Hathaway (BH) is now targeting companies with a 50B+ market capitalization (market cap) — there are fewer options, the companies are less profitable, and more is required to move the % needle [% growth in BH stock] for shareholders.

M on CEO compensation: If you’re in a job you’d pay to have and are an exemplar for the rest of the organization, there is a lot to be said for paying yourself little. B: “If you rise high enough in American business, you have a moral obligation to take less pay.

“Pair trading” — long and short two stocks in the same industry to hedge losses (BP + Chevron, etc.). Useful in 60’s; less useful now.

Press and media are larger factors in changing bad corp/exec behavior than regulators. Boards respond to bad press.

###

How would you answer my question?

“If you were 30 years old and had no dependents but a full-time job that precluded full-time investing, how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage.”

For those interested, here is how I prepared for my “meeting” with Buffett.

The Tim Ferriss Show is one of the most popular podcasts in the world with more than 800 million downloads. It has been selected for "Best of Apple Podcasts" three times, it is often the #1 interview podcast across all of Apple Podcasts, and it's been ranked #1 out of 400,000+ podcasts on many occasions. To listen to any of the past episodes for free, check out this page.

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201 Replies to “Picking Warren Buffett's Brain: Notes from a Novice”

  1. Generic advice. I came here today to ask Tim what has changed about the 4HWW now that the dollar is in decline? How does it affect the you? Now, EU people are buying up the US.

    As for investments, the same is true. The growth opportunities are not US-based. Any investor should be looking in foreign markets, like India, Latin America and to some degree China (but China is riskier. The current inflation is done to hurt the Chinese. If successful, investments there will not work out) less but Buffet et al cannot suggest that because it would come at a price – money reinvested out of the US market into foreign markets would drop the DJIA and NASDAQ, and ruin their current investments.

    I won’t want to be an alarmist, but the US in in decline. Or not so much of a decline, as other countries once inferior are now gaining on us. I’d look to them for real growth potential.

  2. If you know you love a certain company and can stomach the lack of diversity there are great chances for big gains (or losses). If you have less risk tolerance go for the diversification of the index funds. Years ago people said Apple was something to get rid of. I loved my Newton. One of the rubber feet fell off and I called to see what it would cost me to replace the little peel and stick rubber thing. Apple overnighted new rubber feet for my Newton – without me asking them to, and gave me the little replacement feet for free.. Great service and great products. I bought some stock. About 14 per share at the time. Steve Jobs decided to kill the Newton. Bill Gates invested some Microsoft $$$ in Apple. Stock went way up and has been up ever since. I have a number of mutual funds and dabble in individual stocks. It works for me.

  3. Tim,

    With as passionate you are about learning ANYTHING that interests you (I’ve watched your videos and I still can’t figure out how to spin a Bic pen) I would think you would dive into finding a way to utilize the stock market to grow your money. There are an infinite amount of ways to pull money out of the market that require very little time and effort. And best of all, it is challenging and FUN!

    I cringe whenever I hear Buffet suggest index funds. For those who don’t know anything about the market and don’t WANT to know anything, sure they are the best options. But for somebody who sees growing their money as a game and as a challenge, there is nothing like managing your money yourself.

    I would suggest you find a mechanical system of trading that works for you. You can spend 20 minutes a week having a computer pick the best stocks of the moment, hold them for a week, and run your list again the next week (or month). The American Association of Individual Investors compiles a list of several stock “screens” that handily beat any index funds over 10 years. The Zweig screen alone has averaged nearly 40% a year for the last 10 years. That’s a nifty income on a million bucks.

    Once you find a system that fits your style, you can do further research or learning if you want. The Internet has put trading and investing into the hands of everyone and we no longer need to allow brokers and professional traders to have all the fun!

  4. Off-topic: Could you please consider making the post date more visible by size or position in the design of the blog? Thanks for listening /David!

  5. Tim.. some badass is posting ‘bad thing’ about you

    ###

    Hi Henry,

    Not to worry and thanks for the heads up, but it’s no problem. The book polarizes people and some like to attack others on their blogs to try and drive traffic. I just ignore them.

    All the best,

    Tim

  6. Tim,

    The essence of your piece is education and I believe that will be Buffett’s greatest legacy. But do not ignore the work of his business partner – Charlie Munger. I and quite a few others are great followers of his ‘mental models’ thinking approach. It’s not for everyone, but I think anyone planning on investing has to be aware of the big ideas, at the very least.

    I’ve included the link on this post and hope people will find it useful.

    Best wishes – Dean

  7. @Jeff

    “Each year the World Wealth Report is published showing that the world’s wealthiest people hold about around 50% of their wealth in real estate and/or alternative assets.”

    Your case is, boldy put: the rich have 50%+ in real estate, so it must be intelligent. I don’t buy the idea but even if:

    I checked the world wealth record 2007. On page 15 you can see your asumption crumble: They only hold 16-20% depending the year (2004-2008). Although you provided the reasons for your suggestion — that distiguishes you from the rest –, I can not follow your argument we should hold 40% real estate assets instead of ETF etc. Can you clarify that?

  8. You are the one constantly preaching about not needing very much money to live the lifestyle that you do, with a million dollars all in bonds with a 7% annual ROI you are still making $70,000/yr playing it as safe as possible when it comes to monetary investments with all of your time (a much more precious commodity) free for investing how you see fit. You would need to adjust for inflation but it is still quite enough money to spend all of your time traveling, doing volunteer work, kickboxing, tango dancing, enjoying fine wines and chocolates, testing out cars, giving countless interviews, writing for your blog, finally coming up with some new hobbies, or heck maybe even writing another book. But if playing it safe isn’t for you then you are more than welcome to give me the million dollars and I would be more than happy to party it up in the previously described manner!

  9. There is a great show from PBS called “Buffett & Gates Go Back to School”

    http://www.shoppbs.org/product/index.jsp?productId=2477747

    In it they share their thoughts on a number of topics including wealth creation, standing out in the business world and what it means to be *truly* wealthy.

    It’s also interesting because it was recorded 3 years ago and much of what they said has played out (i.e. Gates is now more active in his philanthropy foundation and has stepped back in his role within Microsoft).

    PBS actually has a number of great speials on Warren Buffet, maybe because he tends to be a big supporter of public television.

    P.S. No, I do not work for PBS! 🙂

  10. In answer to your question, I think if I was 30 with no dependents, I would spend a few months studying a group of stocks and invest in a few (3-5) that projected large EPS gains over the next 5 years that also had low current P/E ratios. I think 30 is too early to be overly cautious if you have funds that you can be a bit risky with.

  11. Excellent post, Tim. Thank you. Attending a Berkshire shareholder’s meeting in the next few years is a life goal of mine.

    I have a slightly unrelated question I would like to pose to the readers of this thread (if this is not an appropriate topic then I apologize). This popped in my mind while reading how Tim raced to be one of those at a microphone who could ask a question of the Oracle, and it relates to the general 4HWW tenant of living a life full of excitement:

    How do you get in to the front row at a major rock concert?

    My favorite band ever, AC/DC, is beginning their world tour next month, and I plan to see at least three of their shows. I would love to get in to the front row of at least one, (there will likely be general admission floor seats), but I don’t want to pay 5x face value from a ticket broker. Aside from camping out and being one of the first in through the door, are there any other good guidelines to follow?

  12. Pingback: Blogging for Leads
  13. Tim: I’ve met your blog thanks to this post found via [the link in my name]. Great blog.

    Matt: in the 4th Spanish edition that I have, chapter 20 is the last and it is about “The safety margin as a core part of the investment”

  14. “(B) Chapters 8 and 20 in The Intelligent Investor. (M) Anything by Ben Franklin.”

    I am a bit confused. Did Tim mean “Ben Graham”?

  15. under the “Best books to read for investing and life?” line, did (M) mean Ben Graham or is it really Ben Franklin?

    thanks

  16. Hiya Tim! If I’m reading you correctly, and WB 🙂

    1. The reasoning is, for the least amount of effort, and cost to you, over 30 years and even less time, the ease of access and history of the US stock market is hard to beat. It wins against most things for a 10 to 20 year period as well. (Need money, try to sell a house now! vs. please sell enough to give me X dollars.)

    2. Your effort to manage the money is ZERO, after you put the million in.

    Think about that! — How many activities don’t require you to do anything? And actually have a track record of earning money?

    (I’m trying to promote my music, and yeap, it’s work, ditto a book 🙂 or any job. Being a landlord? REITs are far less work….)

    He’s offering you a great return with no work — but with RISK.

    2.a. Risk, will my life continue if I lose it all. Will I need the money back before it makes more money, at least enough to beat INFLATION. You are a go getter, so why be fearful about things? Dude, let’s face it, doing something on an adventure is far more likely to happen to you than 😉 going quietly into that good night.

    b. Reward? Pays between 9% to 12% on average per year. No effort on your part. Lot easier than witting and promoting a book 🙂

    3. 100% of your time is now freed up to make money other ways.

    4. The index seems to beat MANY mutual funds, and many stocks, about 85% of the time, and keeps “self-correcting” by dropping losers, such as Enron, again, no effort. (I am sure later folks can find examples for this — but again, it’s a zero effort to you.)

    5. There are guys who can beat the market for a time… but only for a time. They charge more money to play, than Vanguard does, although Fidelity also has index funds, etc. at good rates. Vanguard’s fees are hard to beat if you have $1000, $100,000, or the million.

    5. Customer service, ease of use, and focus on the “small investor” Boogle, the founder of Vanguard, has opinions, and let’s put it into perspective — a million is NOT by their standards, with at one point, 4 Trillion dollars under management, not a large account. However, I can speak from my own experience, Vanguard will provide wonderful customer service, spending 50 minutes last night with me, as we worked through some transactions, purchases, and exchanges.

    6. WB takes risks, but in giving this advice, he’s providing great advice that historically has held true– even with all our issues in the USA, we are more transparent about what our companies are doing than many other companies around the world. The US stock market represents international companies, as well as domestic ones. This is part of risk.

    7. To put things into perspective further — how much did your plane flight, trip, and question cost? Vs. say, his book. $1000 vs. $25 — If you had invested the money this week, on some days, it would have earned 5%– and lost 5% the next day — we are in weird times… but it make a great intro to a blog post, to promote your book — you are clever, but too busy — still you get to deduct the trip on your taxes now, as a business expense, etc. your accounting friends, or your own thinking is clear enough — and you likely sold some books, made appearances 🙂

    However, if the choice had simply been see speaker X, vs. stay home and invest… stay home, invest. 🙂 Then…

    8. Go on with life.

    8.a Yes, there is a place for diversification, and I am, and you should be too 🙂 But at the end of the day, age of the investor, and hopes of return, it’s simple personal finance stuff that should be taught to everyone. It’s blessed my life with the ability to pay for some key things, and not worry about the money future, even when the market is down. For most people, they don’t have a million in one place, so their time frame, goals, etc. are different.

    9. However, for you Tim, it’s all one — your life is promoting your message = you message is your life — ditto Derek S. of Cdbaby…

    for me, it’s something like that, the message is about helping people

    -by raising dogs for people in wheelchairs,

    -adopting and raising kids from foster care,

    -writing music for people who are dying from cancer, and need encouragement, etc.

    -However, my motivation isn’t pure profit. I have been blessed because being able to step back and look at other things, I feel less forced into riskier or greedy decisions.

    (Greed and Fear, my dad would say move us in investing… but there can be love and caring for others as well. And yes, humor, hopes, foolish and otherwise… and then looking at it as one of the only games in town….)

    This last would bring out my chief question to you,

    Tim, do you want to put your money in as a blind investment ?

    You need to ask yourself, “I am interested in a return, I don’t care about where the money goes– or you want to support some causes, even if it costs vs. the Index?”

    I read some time ago about the the no pork/no usury Muslim Mutual funds have done pretty well vs. funds with lots of banks in them… they have oil as the basis, not credit… 🙂 That was before the price of oil dropped dramatically….

    But, overall, you might want to consider a fund with a focus on things you believe in…

    But the final point of view I came to, was it was the money I’d take out of it, and how I’d use that money, defined my character, more than what exactly it was invested in… And that I would give now, not just when I die, to the various causes, schools, and people that meant the most to me.

    Volunteering should be easy for some one working only 4 hours a week 🙂

    I will, in the interest of full disclosure, mention I also have holdings in a mutual funds that “screens” out casinos, and some other morally questionable businesses — and interestingly enough, it’s done better than the stock market index — some of these companies don’t do well long term…. certainly not when people don’t have money to gamble…

    Social funds, may beat out the index, but generally have higher costs, and more risks… back to WB and Boogle…

    …[sorry, comment rules!]…

    Thanks for your interesting blog posting.

  17. Hi Tim,

    A few months back you mentioned, “choosing sectors, economies, markets with a moral compass… putting capital to work in positive ways — while hedging risk — is almost a moral obligation”.

    I was impressed by this stance and completely agree. The world economy and markets are suffering because of businesses and individuals run by greed. If I was opening a new account (I already have Vanguard), I would choose a mutual fund called Amana. Most people might never consider it, but Amana does not invest in liquor, pornography, gambling, or banks. These may all be booming businesses, but unfortunately just add to the detriment in our society.

  18. Tim,

    I would invest in optimizing your web businesses w/ respect to conversion rates, opt-ins, etc. Investing in your own business to optimize what is already successful almost always yields the highest returns year over year. I know you are more interested in free time than more money at this point, so the investment could come in the form of a firm to work on that for you on a results-only basis. $1million invested in reducing your business returns, tweeking adwords or upgrading your own marketing systems can easily yield a 30% return year after year is easier (lower risk) and more profitable than virtually any other type of investment.

    Warmest,

    Cole

  19. Hi Tim and others,

    the reason he gave you this advice:

    Buffett let out a small laugh and began. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

    is not that he doesn’t like you, it’s that you were part of the public that is not a sophisticated investor like he is.

    Like most financial advisers nowadays talk about, save money and invest in mutual funds, he gave you the same advice.

    If you were more sophisticated you would have not asked that question in the first place, you would have asked a better question.

    This is not to be negative towards your question all I’m saying is, this is the advice that is the best for the poor and middle class public these days.

    Patrick, investor.

  20. The answer to the question of how a 30 year old should invest his or her first million really depends on what the aim is:

    – Do you want security and a steadily growing net worth?

    – Do you want asset protection and disposable cash flow?

    In my opinion the smart answer would to look for the prior for the first 10-15 years, and then shift increasingly to the latter in the subsequent 10.

    If you agree with that view, then there are certain types of property classes you can hardly go wrong with, as long as you diversify across borders.

    More precise, working class rental properties in countries that are not yet quite industrialised and that have a growing (young) population, will produce both, cash flow and capital growth.

    The emotional reward of giving less fortunate people decent housing at affordable rates while making decent profits at the same time, is f.o.c.

    As the portfolio matures (ie. you get older) and you require more disposable cash flow, you start adding rentals in growth areas for the lower middle class, as well as commercial property in the same areas.

    Throw in an occasional purchase of agricultural land (orchards, forests, etc.) in the same countries, and you should be set for a life in comfort, a few years after starting, because you never have to sweat stock market turbulences, wonder about the global recession, nor do you need to check if the millionnaire in your top of the line holiday rental had everything with Madoff.

    Poor people also have much better payment morale, especially when it comes to their rent.

    Cheers,

    Robert.

  21. I was not surprised at the % of “volatility able” voters. However, I have experience: After 9/11, my 401K bled $700 per month while I was putting in $500. I had a “moderate risk” spread of stocks and bonds and whatever else. The seller/manager had promised “You’ll at least get your investment back.” Yeah, right. Not at this rate. After three months, I couldn’t stand the bleeding and stood my ground to move out of stocks completely. He practically begged me to keep the stocks as part of my spread, but I refused. I have no idea what the percentage was, nor did I feel panicky — I just wasn’t going to waste my money anymore. Bitte.

  22. Hi..

    Are you still looking for the answer to how to invest your first mil?

    I would put it in one basket and watch that basket very carefully…stay away from the stock market and currencies..the whole world has become Vegas…

    The basket I suggest is – real estate…Real estate will always work against inflation(in the long term)..Governments have a habit of printing money every few years..(this year more than others)..

    And of course, watch your expenses very, very carefully…

  23. M: “The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity.” B: “There are situations, for the full-time investor, where it’d be a mistake not to invest 50% of your net worth in one business.” If more aggressive: small stocks and specialized bonds, but no currencies.

    I read through the comments and realized very few people mentioned this part of the conversation. They are suggesting non-diversification isn’t it? Then your $1 million ought to be put into say at most 5-8 specific businesses’ stocks/bonds (which is what they are doing in Berkshire now – buying bonds/stocks of Goldman,GE,etc)? And not “10% in X sector, 20% in Y sector, etc..”, unless if you know nothing 🙂

    Peace

  24. As soon as I read Buffet’s response, I thought the old saying, there is nothing new under the sun. Buffet just rephrased a quote by Confuscious;

    “Before enlightenment, chop wood, carry water. After enlightenment, chop wood, carry water.”

    Which reminds me, I need to go chop wood and carry water, now.

    Steve

  25. Hi Tim,
    I was actually at the AGM (as a student attendee) and remember hearing this question. Didn't realize it was YOU asking it. Great question, would have loved to meet up if I knew it was you.

  26. Tim et al… Read Phil Town’s Rule #1 (as I’m sure you have)… then signup for Investools Investing Foundation Course by doing their online course material (8hrs) and then go to their 2 day workshop – don’t sign up for the options and advanced classes unless you want to become an active trader – its a waste of time and money. Phil teaches you the 4 M’s here and its based on Buffett’s rule of “don’t lose money”… http://www.philtown.com/phil_towns_blog/2006/02/the_four_ms_qui.html

    The information I provided above is ideal for the beginning to novice investor – those that are in the industry will be the first to criticize. The industry folks will criticize because its not how they make money which is from the fees they charge by investing in Mutual Funds. Buffett knows this and it is why he says to invest in an S&P low fee index fund – Investools teaches you how to get in and how to get out and how to protect your money. Money Management is the key to success in investing and there is no formula.

    I picked up your book because Phil Town’s name is on the top – couldn’t pass it up. I’m a 35 year old IBMer with all the desire in the world to break free. Hope to be next to you on another flight to Buenos Aires one day with a bottle of Malbec… All the best. Andrew

  27. I would invest some portion of it to a index fund, in order to preserve capital in the long run and recieve modest growth. Maybe 10-20% of it.

    The rest of it I would invest to small businesses with high growth potential. I would not do these investments simultanusly, but will be investing step by step. Before investements I would study the company and it’s managers carefully and to some extent I would be participating in the management process. Actually I would prefer investing to the companies, where I know the managment personally. This kind of a strategy can be viewed as risky, but it will provide an opportunity for higher capital gains and what is more important for me, it will allow to aquire knowledge about investement and business development at the grass-root level.

  28. Hi Tim,

    Let’s start from this assumption: “Simplicity is the greatest sophistication” by Leonardo Da Vinci.

    Hence, give a look to this simple but effective investment strategy at this website: http://www.dogsofthedow.com/

    All the very best with your new book ( already bought the previous: very interesting, it broadens your mind!) and your life

  29. I think if your strategy is solid – it doesn’t matter which way the market moves.

    If you do a buy/write (rent shares), with a stop loss at the price minus premium , your money a) spends less time in the market, b) your loss will be very minimal c) you get further potential for profit if the order is exercised d) (most importantly) this takes about half an hour a month.

    I used to leverage my exposure out as far as the bank would let me – but I found that even though that strategy requires no more effort – it results in very little sleep. My maximum exposure is 50-50, no more. Anything else will have you freaking out.

    An easy, time cheap way to make 30% -60% per year – but seldom more.

    I don’t know much, but I DO know that I hate pouring over the stock market for hours and hours. I know that I don’t like depending on my feeble human emotion to make financial decisions – I’d rather have a plan that works regardless. The stock market will always be crazy – predicting where they are going takes too long.

    I’d say just find a strategy that let’s you live away from the stockmarket, sleep at night, and enjoy the rest of the world outside of finance.

    T

  30. Hi Tim,

    Again:let’s start from this assumption: “Simplicity is the greatest sophistication” by Leonardo Da Vinci!!

    Therefore, have a look at this other simple but effective investment strategy on this website: http://www.magicformulainvesting.com

    The book that explains this simple but effective investment strategy is:

    “The Little Book that Beats The Market”

    by Joel Greenblatt, mutual fund manager and university professor.

    All the very best with your new book and your life!!

  31. Tim,

    Thanks. I can recommend The Snowball: Warren Buffet and the Business of Life. The book is a great glimpse into Buffet’s life, for all its success and oddity. It is written very well, by an astute financial mind in Alice Schroeder, who had previously spent many years covering BRK. If you haven’t read it and want a summary of the book, click the website provided in my comment entry – there’s one there. All the best, and keep up the positive posting!

    Chad

  32. Yes – follow the S&P 500. Probably the best advice Warren gives for free. But, look at the statistics – the 500 beats something like 85% – 90% of all managed funds – and does it cheaper than them as well!

    Glad you got to ask him a question.

    Dan

  33. I think Warren’s advice is great but has one flaw: It’s totally US centric. The growth rate of India and China is likely to massively exceed the grows of the US over the next 20 years. Also Warren hardly ever recommends his own stock even though it’s likely to do better than the index. Personally I’m putting 25% of my cash into Berkshire shares, around 50% into an Indian value investing hedge fund that has no fees for the first 6% of return per year (this is safer from a fee perspective than an index fund, but has the advantage of picking value stocks in a massively growing economy rather than just going with the US which is not as likely to grow so fast) and the other 25% in Internet business that I know something about.

  34. Amazing that such a quick response from Warren Buffett gets so much analysis. But he’s certainly proved his worth.

    I agree with comments in here that real estate and international index funds should probably be added. This helps diversification (albeit introducing exchange rate risk) and with real estate you get the benefit of gearing without being marked to market each day.

    Most people understand real estate better than they understand the stock market too! I think Warren also once said he’d never invest in what he didn’t understand quickly.

  35. I am a great admirer of Warren Buffet. He is someone so effective with this instructions, that can change perceptions of people altogether. Great Personality!

  36. It’s very generous of you to have done all this research and shared it.

    My question for Buffett — if I do what you did (and you’re selling me on the B.H. meeting) — would be:

    “If Warren Buffett had never invested and never become a billionaire — who would you be and how would people think about you?”

  37. I have a web site where I research stocks under five dollars. I am a astute value investor. I do not believe that warren buffett is the value investor he was years ago if he was he most certainly would have caught the spectacular comeback of ford motor. the stock was trading at just 1 dollar a share two years ago the shares trade at 16 dollars today and the company is well on its way to becoming the leading world automobile company. another example is apple computer the shares traded at just 5 dollars in 1998 today they trade at 340 dollars. he did not see this one either their are numerous other examples.

  38. Superb post but I was wanting to know if you could write a litte more on this subject? I’d be very thankful if you could elaborate a little bit more. Thanks!

  39. Excellent post , I’ve found this very interesting. A great deal of useful information . I’m in particular interested in the info on bodyweight problems. Have you ever tried using lipobind intended for minimizing fat absorption? If not, do give it a try. It is working for me. . Many Thanks. Charlotte Bailey

  40. I know I’m very late on this comment, but I decided to dig into the archives a little on the Blog, and thought I’d share what I’d do with the Million $. Mine is an extremely simple approach, but that’s the whole point. If this precludes full-time investing and you don’t have a lot of investment knowledge or time maybe, it doesn’t really matter in this case. This would be a once-a-month transaction that would easily earn a monthly income enough for me personally to retire today and still have money left to continue to invest.

    I’d take the $1,000,000 and use it to sell FRONT MONTH Cash Secured Puts or Covered Calls (depending on the market) on whichever of the 2 ETFs I liked better between SPY and EFA. This is the perfect time to give specific examples of today’s numbers, since it would be exactly today that the previous month’s options would expire. So if I were to be doing this, I could have either sold my options again today, or waited until the market opened again on Tuesday (Monday is President’s day). Keep in mind, the main thing here is to stay at your cost basis or better in regard to the strike price you choose, which essentially uses that $1,000,000 and you live off the “interest”. So, depending on how close to the At The Money option you wanted to be (risking only the chance of owning the ETF until you were called out eventually), here are the numbers for this month:

    SPY – Aggressive (At The Money) $16,571 monthly gain

    SPY – Conservative (2 steps out of the money) $11,544

    EFA – Aggressive (At The Money) $19,980 monthly gain

    EFA – Conservative (2 steps out of the money) $11,136

    So since I personally live a fairly modest lifestyle, and as you have already pointed out with several examples using geoarbitrage, this amount per month would easily be enough to live comfortably without working at all if you didn’t want, while still having plenty left to re-invest or do with whatever you’d choose!

    Thanks for the chance to answer,

    Paul

  41. I’d buy some houses and rent them out, this would easily produce enough money to enjoy financial freedom.

    1. i disagree! It will give you enough income to live on and become lazy and never progress, a mill of property doesn’t give you that much income!

  42. “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…” Warren Buffet:

    There was a index mentioned hear right after this quote or within this quote when I checked it few weeks ago… is that index removed.. it was something like vn.. I do not remember and I cannot find this.

    Does anyone know which index it was. It had 10% increase since start of this year.???

  43. If you know stocks well, focus value/growth investing like Mr B says.

    If not, indexes.

    For going down the route of choosing stocks ( which, alas, takes a significant amount of time), I recommend high ROCE companies with low debt, high margins- highest in the industry preferably, good management, a simple model (” that any idiot could run, as one day, one will” Peter Lynch), and a realistic model for growth. A good, clean past too. Any capitalisation, but I personally prefer £200M+ as then they don’t need to split or add shares to fund growth ( how annoying is that when that happens!). A wide moat is a big bonus.

    An enterprising investor (many value investors do not buy into cyclicals) might also consider a percentage in cyclicals. I only invest in cyclicals when they are considered close to cigar butts- low valuation/ high net assets/book value. If they are strong companies they often bounce back strongly, along with their share price. Quite pleasing when that happens too. Every earnings release feels like your birthday (if you pick well- of course). That is also wonderfully true of growth/value stocks…

  44. Dear Tim, I had dinner with Mr. Buffett.

    I’m a 26 year old CA native, investor and entrepreneur in both music and now beverages (I own a Kombucha Tea company).. I’m a fan of yours, Warrens.. and pu erh.

    I had dinner with Warren Buffett around last Thanksgiving due to close family friends. Before meeting him, I was a becoming a believer in an EMP and “high probability” option strategies (strangles, etc).

    Along with “the Intelligent Investor”.. he also recommended Adam Smith’s “Supermoney” – a must.

    I’m now an aspiring Buffett-ologist, but can’t shake interest in options. I’m sure you’re working with more that 1M these days… so I wanted to offer a suggestion maybe you hadn’t heard (along with value investing):

    Try selling strangle positions about 50 days out, each strike at 2 standard deviations away from stock price. That should leave enough margin of safety to allow them to expire worthless a majority of the time. A woman named Karen has been VERY successful with this method: http://www.youtube.com/watch?v=BquDGE9KxZQ

    Let me know how it goes. It’s a strategy that really only makes sense when starting with a good chunk of change.

    If you like Kombucha, stop by our place in LA sometime!

    Best,

    Trey

    1. If your a lazy investor with no idea of how markets work, id suggest buying an ETF when there is ‘blood on the streets’ and from there dollar cost average and try to never look at your balance. from here, A bear market is actually a great thing, as you get more units for each $1 you put in, so when the next bull starts, your in a much better position.

      If your an active market participant, there are far better ways to invest in the market than index etfs.

      Its my view, that finance professionals etc advocate such etfs to keep those that do not understand how the market works ‘Out of the market’.

      A bull market MUST CLIMB THE ‘WALL OF WORRY’ as this keeps the weak, emotional, uninformed public who react to news and do not understand the game.. OUT OF THE GAME

      The reason for this is that if you have all these weak people in the market, this creates unwanted resistance (sellers) that professional money has to absorb so prices can continue higher. This increases business costs… not ideal.

      So , obviously professionals want the least amount of resistance as possible.

      When a market correct occurs, its simply a case of professional money needing to flush out the weak, so the bull campaign can continue.

      So simple, yet not many understand these concepts.

      Cheers

      1. @ 25 I take an aggressive approach to my investment strategies outside of my 401k and Roth as I have very little financial obligations. I chose my shorts and longs primarily based on a fundamental approach. Shorter term for value while long term for growth. Technical evaluation comes into play when determining stops, targeted exits, etc. 5-7 companies max that I can watch in correlation to the market as a whole.

  45. I know warren buffet is mega rich and hes a really nice guy and blah blah. I just think there are better people to follow in terms of investing. Like Jim Rogers for example

  46. The book, “A Random Walk Down Wall Street”, is a good place to start. It basically advocates the same strategy Mr. Buffet espouses: diversification across broad-market index funds, etfs, bonds, and some Real Estate Investment trusts—depending on your age and your risk tolerance. You should be in it for the long haul, and allow compound interest to be your friend. If you move in and out of the market a lot, your gains are often nullified by capital gains and investment fees.

    90% of fund managers can’t beat the market, and they charge you for the pleasure of investing with them. The old adage seems to be true: that monkeys throwing darts at a board could do the same (if not better job) picking stocks as these professionals.

    1. Not so fast— Messrs. Buffett and Munger take a different view. From Tim’s blog post (above): ‘M: “The whole secret of successful investing [full-timers] is non-diversification. If you know nothing –> diversity.” B: “There are situations, for the full-time investor, where it’d be a mistake not to invest 50% of your net worth in one business.’

      They reject Burton Malkiel outright and they embrace Graham/Dodd whole heartedly.

  47. 80% index fund, 20% algo trading. Worked for me. Sounds a lot of work, but isnt. Acutally, the 4 hour work week shows the way: no need to program yourself, you can outsource. What you will have to do, though, is read through the books of a few people who hacked not only finance but complexity in general. Go for the usual suspects of the Santa Fe Institute. From there on, you will quickly learn that the two most important articles on prediction of chaotic time series are from the 80s/90s, no match for modern computing power. Also, add a few piece on agent-based modelling (just to get an idea about dynamics), and artificial intelligence if you want to get fancy (in particular, deep belief nets and support vector machines). Last but not least, get “Trading Systems and Money Management”, it gives you the surprisingly simple statistics behind successful trading. The 80% index give you a rather safe long-term bet, but the 20% will challenge you intellectually, you will develop a very good understanding of the market, and of course it gives you upside potential.

  48. Good Question –

    Overrider – if you are employed full time then spend it all on a business. Preferably one that you don’t have to manage. This will give you the time and cash-flow to spend more time as an investor. If you don’t want to own your own business and prefer to invest while being an employee –

    1. Find some people you trust and get their best speculative stock (that they themselves know a heap about and are heavily invested in) that is on the verge (12-18 months) of being cash flow neutral. Do your own research to quantify their views, and invest 30% in that one single stock. (note: doesn’t have to be in your existing circle of competence as this will limit your options but it does have to be in the circle of competence of the person you trust.)

    2. Join an Angel investors club and allocate 20% to making investments in start-ups.

    3. Keep the rest in cash, and double down on your spec stock or your angel investments when the opportunity arises.

    Once you get a 1X total return, start allocating 50% of your fund to long term stocks, selling only if you have to. Keep the other 50% in spec stocks/startups, and keep the strategy rolling. The only thing that changes is the size of the bets, not the bets themselves.

  49. I used to do a little equity analysis, and I actually gave the same advice to a friend a couple of weeks ago: if you don’t have the time, just by a Vanguard ETF that tracks the market.

    The DJ Industrial & SP500 avg 8% return per year with 17% SD (based on data over the past 100 years); hence there will be a lot of ups and downs, but if you hold on to the ETF you buy, the expected return over the long haul is 8% per year. A full time professional investor puts at least 40 hours into just researching one stock/business, and most of these businesses don’t get put into the portfolio (unless it’s a index-type portfolio…which a lot of professional portfolios are…). Even then, most professional investors only beat the market by 2-4% consistently.

    Hence, an 8% annual return avg is not bad, its probably the most efficient investment you can make considering you don’t have to do any research, you just buy it once and hold it. Pretty much the only things you have to consider when buying a market ETF are: 1. Is the ETF maker reliable (Vanguard is) 2. Do I think the US economy will collapse & stop growing (probably not). We can’t argue with the Oracle.

  50. OMG! The first audio book I bought was The Warren Buffet Way by Robert G. Hagstrom and I remembered I wanted to buy a share of Berkshire & Hattaway so I could get to attend the annual shareholders meeting… I still have a piggy bank for that particular purpose. If I ever get too close to ask him a question that’d be “If I beat you and Bill Gates at the throwing newspaper contest, can I be your apprentice?” followed by where is the best place to eat steaks in Omaha 🙂

    Sorry if I didn’t answer your question, but I had to share this.

  51. i would take an asset i know most about (not something i have to take advice on from others). then split the million bockeroos as many ways as possible to hedge my risk so each can be tracked. given that i have some understanding of the asset class, most stock should rise to outweigh those that drop.

    for me, take property in a rising market, you don’t need to know the location as long as the estate agents / realtors are busy, thats a good sign. split your cash and leverage it to buy as many units as possible that appear “good” value for money.

    then take your mind off the asset you’ve invested in, have a beer, check its value in 12-18 months so you don’t constantly worry about it in the meantime (its value will probably fluctuate). if you’ve made a profit, consider divesting and enjoying your profit or re-invest it. Boom.

    if you don’t understand the asset you are investing in though, you are just gambling.

  52. I’m 22 and have no experience so I’d have no idea how to answer that question.

    Thanks for the post though, very interesting.

  53. Funny he didn’t say jus to put those million or a good part of it in BRK shares.

    Tim, I recently launched my nutrition bar. I agree with Buffett. Because I believe in the product I am investing some of my money in my own business. But investing in one’s own business would have to be high risk tolerance pattern, much different from investing in an index fund, no?

  54. Tim,

    I agree on either low cost index funds or focused non-diversification (based on how much time you’re willing to put into investing). I recommend Rule #1 (2006) by Phil Town along with The Intelligent Investor (1973) by Ben Graham and Security Analysis (1934) by Ben Graham & David Dodd.

    Phil Town’s blurb on your cover is why I first bought 4HWW. (Thanks for signing my 1st edition when we met at Calabasas with Neil last October. I was tongue tied at meeting you and could have talked your ear off about investing had I suspected your interest. Neil has video of me doing that from last July.)

    My 14 year old daughter manages her own portfolio using Graham/Dodd (Buffett/Munger) ideas and has been invited to do a TEDx talk in Zürich based upon her experience. (I can offer you a guest post on that if you like.)

    Sincere respect

    James

  55. I’d invest in learning how to build businesses.

    Rather than spending the money on an MBA though, I’d consider things like actually starting the business, hiring staff more experienced than I in my weak areas, testing, failing, reading material, etc.

    I’d say sequencing is important

    The person steering the ship might not be more important than the ship but if he/she doesn’t know how to pick a good ship or how to steer it, good luck getting to the other side of the Atlantic.

  56. Cool so:

    80% in a Vanguard ETF

    20% in equity of stuff I’m interested in/will put effort into

    If I lose all my money in the next 5 years your asses are mine!

    J

  57. Have you read Phil Town’s books: “Rule #1” and “Payback Time”? It goes into detail about the basics of value style of investing. It is like buying a product at a wholesale price then turning around and selling it at retail. The hard part is finding the ‘true’ value of the stock. Then you buy it when it is well below the value, and wait for it to increase in value to sell it for a profit. There are other sites that provide the search tools and calculations for you. It is practically handed to you, all you need to do decide which one(s) you want to buy. Some sites are Big5ROIReports.com or BigMoatStocks.com.

  58. If I had a full time job then I’d make sure it was in a field I found very interesting, if it was then that’s where I’d invest. For example I find real estate technology very interesting at the moment and this is where I’d put all of my.

    If I wasn’t in the field I wanted to be in I’d come up with a business that encompasses it. I’d give myself 100k and see how far that takes me, from there I could either keep investing in myself to further gain skills in the field I found interesting or quit altogether and leave the money for a rainy day while finding employment.

    Another approach is investing in Elon Musk’s next company 😉

  59. Thank you for sharing your experience with Mr Buffett, this is totally useful. I will take into account the advice which you received from Mr Buffett, good luck I have to say!

  60. Buffett’s “secret” is buy things that are selling for less than they are worth.

    Invest in a few companies that are cheap and have good management. Not all of them will rise, but most will. Put probability on your side.

    It requires intelligence, patience, and confidence.

    Nobody tells you this, because they don’t make money off of it.

    Read every book he recommends. Read the Letters to Shareholders. Find a good book about him. I recommend Hagstrom’s.

    Or you could go to the casino and put it all on black.

  61. With $1m buy a modest house you could live in if needed, some $ in term deposit, some in shares. All you need is a shelter, food, be able to pay the bills, enjoy a holiday, a good book and some one or something to cuddle. All the rest is surplus. relax a bit. Making money is not what life should be about.

  62. Even Wealthfront allocates your $ into low-cost index funds when you 1st take its risk assessment test.

    Since I suck at business valuation right now, I’m going with B: invest all of $1mm in Vanguard 500.

  63. Invest it in the only stock you control: your own firm. I’ve had a peak behind to many public firms to know the gulf between reality and PR is scary.

  64. Great content as usual Tim! Warren Buffett and Charlie Munger are brilliant. I had the chance to watch them take questions at Berkshire’s shareholder meeting.

  65. I run an investment company and what we do / I would do / we have created 2 low cost funds managed by Morningstar investing in passives vanguards, etf,s , indexes – global growth and global defensive – do a risk profile if balanced bang your million in 50/50 and get back to work

  66. “All the way from San Francisco”?? 🙂

    I travel from Australia every year to Omaha!! W and C are the best dose of common sense there is!!

    Great notes and great question

  67. i’m a big Buffet fan.

    been reading all i can get my hands on about Buffett so thanks for this treat!

    took notes and screenshots 😉