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DK

Buffett: This Is The Most Important Investment Lesson In The World

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Thanks for sharing DK

 

This sums it up pretty well

 

“No consultant in the world is going to tell you just buy an S&P index fund and sit for the next 50 years,” he said. “You don't get to be a consultant that way and you certainly don’t get an annual fee that way.”

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Read these two article on Buffett. There is much more to the story that isn't being told in the media today. Buffett is not as much as a buy and holder as most think he is.

 

http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP

 

http://archive.fortune.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm

 

 

 

"Price is what you pay. Value is what you get." - Warren Buffett

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Ken,

Once again all we have as investors is today and tomorrow. Of course with Buffet's past data, I would have invested everything I had with him. Unfortunately, Berkshire Hathaway was not a choice in my 403b plan. And of course, there are a few managers that beat the heck out of the indexes, but how do you choose the right one. All we have is the future and the risk is sky high that we will not choose the right manager. Even so, those managers will lose their status in a year or two and then have to pick the next high flyer.

 

I know we will never agree on this basic principle of active vs passive because of our genetic wiring, just like politics and whether the Apple or Windows and Ford or Chevy is a better computer and car respectively.

 

I am just fortunate that much of my wealth has to do with what I did rather than what the market or active managers might have done:

  1. live within my means,
  2. pay off debts early,
  3. always save a little by paying yourself first,
  4. learn to be a do-it-yourselfer,
  5. making mistakes that I learned from,
  6. constructing a fully diversified portfolio with an allocation of fixed accounts that meet with my goals and age,
  7. avoid 403b annuities. In other words, keep your investments and insurance needs separate.
  8. and finally, and most all, paying a lot of attention to investment costs.

The seven strategies are in all of the investment books I read. Why? Cause that's where I got this valuable information about attaining wealth in the first place. Remember, I am an educator, not a professional investor. :- )

 

Have a great week,

Steve

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  1. and finally, and most all, paying little in investment costs.

Steve, you meant "paying a lot of attention to" didn't you?

 

 

Hi Krow36,

 

Yes and no. Its hard to say what I didn't do because the purpose of the list is to show Ken what I did (rather than what the market did, or somebody else did).

I did not pay excessive costs. But I like your version, "paying a lot of attention" to investment costs.

The positive is almost always easier to explain and a lot less confusing.

 

thanks!

Steve

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I'm not disagreeing with Steve's words of wisdom........I'm trying to add to them.

 

If investors are willing to learn, here is the simple math behind returns:

 

"Waiting For Average Why The Long-Term Average Will Never Occur For Today’s Investors"

 

http://www.crestmontresearch.com/docs/Stock-Waiting-For-Avg.pdf

 

 

 

Here is the long version of the PE report

 

http://www.crestmontresearch.com/docs/Stock-There-Yet.pdf

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Ken,

As I said we will never agree. I disagree that anything outside of what the investor can do will "will add them." (Noticed I added one for my teacher colleagues specifically).

 

Love your quote: "Waiting For Average Why The Long-Term Average Will Never Occur For Today’s Investors"

 

Here are a few more from back in the dark ages of 1979 when my hair was pitch black.

 

The now famous "Death of Equities" article appearing in Business Week on August 13, 1979:

 

BusinessWeek, 1979:
"This 'death of equity' can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms."
Financial Times, 2012:
"Stocks have not been so far out of favor for half a century. Many declare the 'cult of the equity' dead."

 

BusinessWeek, 1979:
"Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes."
Financial Times, 2012:
"The pressure to cut equity exposure is being felt across the savings industry. … In the US, inflows to bond funds have exceeded equity inflows every year since 2007, with outright net redemptions from equity funds in each of the past five years."

 

BusinessWeek, 1979:

 

"Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack."
Financial Times, 2012: "With equity financing expensive, many companies are opting to raise debt instead, or to retire equity."

 

BusinessWeek, 1979:

 

"We have entered a new financial age. The old rules no longer apply." —Quotation attributed to Alan B. Coleman, dean of business school, Southern Methodist University
Financial Times, 2012:

 

"The rules of the game have changed." —Quotation attributed to Andreas Utermann, Allianz Insurance

BusinessWeek, 1979:

 

"Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared."
Financial Times, 2012:

 

"Few people doubt, however, that the old cult of the equity—which steered long-term savers into loading their portfolios with shares—has died."

- See more at: http://servowealth.com/resources/articles/death-equities-revisited-0#sthash.NoIc1aKc.dpuf

 

Here is another quote: "Never say never."

 

Have a great day,

Steve

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Ken has a different investment philosophy than I do. I have the same philosophy of Bogleheads: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy or Vanguard's philosophy: https://about.vanguard.com/what-sets-vanguard-apart/principles-for-investing-success/

 

I am so fortunate that I found Bogleheads 12 years ago at the ripe young age of 56! I am very happy that Ken has the courage to come here and show what a different investment philosophy looks like and how to talk to potential advisers, and recognize their philosophy. It is very important if you are seeking an adviser. The chances are if you seek a financial adviser, said adviser may have the same philosophy of active management. If you are an active manager, and want "excitement" in your portfolio, then Ken is your man! Go for it.

 

If you are like me, and want a "boring" portfolio with the primary goal of setting up a fully diversified low cost indexed portfolio then seek out advisers on the Garrett Planning Networks or National Association of Personal Financial Advisers.

 

I outlined my basic approach to building wealth is to totally forget about performance, because I nor Ken, nor the highly elite, quants from IVY league schools, Cal Tech, Stanford or Chicago economics phds can do anything about it. Nobody can predict the future. Think about the death of equities article written in 1979 and for the next three decades investors had TREMENDOUS GROWTH.

 

All we can do is what I listed about, and my journey was with a ton of mistakes, but the key was to stick to a plan and make adjustments as you learn. BTW, the vast majority of Americans cannot do or will not do any of my list. It's deplorable.

 

Your risk tolerance will be tested as mine was tested during two of the markets worst crashes in history. The first one Dan and I were 100% in equities, way too risky for anybody in the 50s. But we learned and now reaping the benefits with paying extremely low costs, fully diversified between the five basic asset classes, all indexes with an allocation of bonds. My split is now 30/70 stocks/bonds, so I am ready for anything, except Armageddon, at which time we are all doomed, but that is not going to happen. It may feel like it, but Armageddon is when entire civilizations collapse. Our world is too complicated and developed for that to happen. 2000-2002 and the 2008 crashes were NOT Armageddon! They were good old fashion crashes.

 

Have a great day,

Steve

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Ken,

As I said we will never agree. I disagree that anything outside of what the investor can do will "will add them." (Noticed I added one for my teacher colleagues specifically).

 

Love your quote: "Waiting For Average Why The Long-Term Average Will Never Occur For Today’s Investors"

 

Here are a few more from back in the dark ages of 1979 when my hair was pitch black.

 

The now famous "Death of Equities" article appearing in Business Week on August 13, 1979:

 

BusinessWeek, 1979:

"This 'death of equity' can no longer be seen as something a stock market rally—however strong—will check. It has persisted for more than ten years through market rallies, business cycles, recession, recoveries, and booms."

Financial Times, 2012:

"Stocks have not been so far out of favor for half a century. Many declare the 'cult of the equity' dead."

 

BusinessWeek, 1979:

"Individuals who are not gobbling up hard assets are flocking to money market funds to nail down high rates, or into municipal bonds to escape heavy taxes on inflated incomes."

Financial Times, 2012:

"The pressure to cut equity exposure is being felt across the savings industry. … In the US, inflows to bond funds have exceeded equity inflows every year since 2007, with outright net redemptions from equity funds in each of the past five years."

 

BusinessWeek, 1979:

 

"Few corporations can find buyers for their stocks, forcing them to add debt to a point where balance sheets seem permanently out of whack."

Financial Times, 2012: "With equity financing expensive, many companies are opting to raise debt instead, or to retire equity."

 

BusinessWeek, 1979:

 

"We have entered a new financial age. The old rules no longer apply." —Quotation attributed to Alan B. Coleman, dean of business school, Southern Methodist University

Financial Times, 2012:

 

"The rules of the game have changed." —Quotation attributed to Andreas Utermann, Allianz Insurance

BusinessWeek, 1979:

 

"Today, the old attitude of buying solid stocks as a cornerstone for one's life savings and retirement has simply disappeared."

Financial Times, 2012:

 

"Few people doubt, however, that the old cult of the equity—which steered long-term savers into loading their portfolios with shares—has died."

- See more at: http://servowealth.com/resources/articles/death-equities-revisited-0#sthash.NoIc1aKc.dpuf

 

Here is another quote: "Never say never."

 

Have a great day,

Steve

 

Steve,

 

http://www.multpl.com/shiller-pe/

 

When Shiller P/E is at 10X or Less than returns will be above historic average for the next 10-12 years. Today the Shiller P/E is at 26X so the next 10-12 years may have below average rates of return. The Buffet Indicator points to the same outcomes.

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Ken,

 

I think we agree on something. I just want to ad that journalists get their information from the quants, leading brokers, brokerage firms, the big banks and the hundreds of non Boglehead financial mucky mucks that they interview. You point to just journalists, its more than the media, its the entire Wall Street machine that combines the corporate media and Wall Street. Wall Street wants and needs people to churn their investments. All of the major investment companies on wall street have share holders to satisfy (NOT Vanguard or TIAA CREF). Of course the media wants to sell magazines and generate money from TV ads, but they have to get eyes and clicks. And what better way than to scare people into buying into the current trend in which you have advocated, precious metals. Tom Hartman, the radio commentator who I agree with his politics, advocates buying gold because he is predicting a stock market crash for over a year now. What crap. Its all a business to distract people, and to keep people listening to Tom's show. It must be working because his terrible ad has been going for many months now.

 

Steve

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Steve,

 

I was asked by a local math/economics teacher to give financial presentations on various investment topics. The teacher asked what topic I wanted to give first. I said it only makes sense to start with the History of Money. I have a 50 slide power point on this. My guess is that 99.9% of people on this planet don't know the history of money.

 

Once one understands the history of money (or the demise of) they will understand that paper is not money.....they are debt instruments. "Federal Reserve Note" maybe I'm crazy but a note by definition is a debt / a paper IOU.

 

Here is some history I find fascinating. (Netflix has a great series on Marco Polo that is worth watching)

 

http://www.pbs.org/wgbh/nova/ancient/history-money.html

 

Paper Currency

The first known paper banknotes appeared in China. In all, China experienced over 500 years of early paper money, spanning from the ninth through the fifteenth century. Over this period, paper notes grew in production to the point that their value rapidly depreciated and inflation soared. Then beginning in 1455, the use of paper money in China disappeared for several hundred years. This was still many years before paper currency would reappear in Europe, and three centuries before it was considered common.

 

http://afe.easia.columbia.edu/song/econ/money.htm

 

According to Marco Polo :

 

Marco Polo astonished the Western world when he described the use of paper currency throughout Khubilai Khan’s Yuan dynasty: With these pieces of paper, made as I have described, he [Khubilai Khan] causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends. And nobody, however important he may think himself, dares to refuse them on pain of death. And indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold. And all the while they are so light that ten bezants’ worth does not weigh one golden bezant.

Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to any one but the Emperor

 

 

Sound familiar? So bankers and governments never learn from history. They want money for nothing. Governments can not create wealth they can only destroy it or redistribute it. When I see governments and central banks fighting the largest currency war in history. .........It is a pretty easy to see the winners and losers.

 

I have no faith in Bankers, Governments or Its politicians.

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History of money is fascinating. Do you know the history of bread? Bread has been a staple for humans for most of our history. When yeast was introduced only the wealthy consumed it. Yeast was known as a status symbol.

 

Without Governments or its politicians, as negative as they seem, without a government we would have Armageddon. We had a picture of that in the days after Katrina, when all hell broke loose in New Orleans for a few days.

 

All through the Middle ages, the "dark ages" were not named that way for nothing. Very little advancement because there was no rule of law, or civilization or governments for 1000 years. That's why cities were built on hills to protect themselves from the roaming savages who ruled Europe after the fall of the Romans until the 15th century.

 

Go for a walk down the halls of your local, county, state and especially DC government buildings and talk with the aides and watch how civilization works. It is remarkable how wise our forefathers were. Capitalism would last about five seconds without the rule of law, infrastructure, public good regarding education, healthcare, natural disasters and transportation.

 

Sometimes I ask a restaurant owner if he or she carries sick day benefits for his or her employees. If he doesn't I ask what might happen to me and his customers dining if one of your cooks is sick and HAS TO WORK because he or she has kids to feed. This is the real world Ken, not an ideology.

 

We need government to have a civilization, there is no turning back to the "dark ages." Civilization by the government is not perfect, what is the alternative? Yeah, we had weak government and that turned into our 2008, when we were on the brink of collapse but it was the government who bailed out us. We had it your way, private sector ruled wall street, DC, white house, congress for six straight years, but individuals got greedy and that turned into the worst financial disaster since the great depression.

 

Perhaps we are doomed, but I still remember the Cuban Missile Crisis....and we got through that. We will get through this because of the new attitude of the millennials. I really like the attitude of young adults these days. They are not hung up on the culture wars that the baby boomers regretfully still have after half century.

 

Have a great day,

Steve

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Also Buffett now bashes a very similar fee schedule that he started his fund with.

 

"The compensation structure for Warren Buffett’s partnerships was fairly simple. Investors received 6% interest on their money from the partnership and 75% of profits above this threshold."

 

[...] I'm just pointing out something the media is not discussing about their Hero....Mr Buffett.

 

If the idea here is that the fee structure of his partnerships in the 1950s constitute some sort of "smoking gun" that reveals Buffett to be a hypocrite, I emphatically disagree. A similar charge could be levelled at John Bogle, who began his career running managed mutual funds with fees and expenses that we would now find alarming. It is a mistake is to treat the context of the 50s or 60s as equivalent to the present. The low cost index funds that both men now tout did not exist at that time, nor did most of the academic research that revealed the wisdom of index investing.

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