Beware the ides of War­ren

Let me tell you a story about how I quadru­pled my money.

The Sunday Telegraph (Sydney) - - WORLD -

IN Septem­ber 2011, War­ren Buf­fett’s com­pany, Berk­shire Hath­away, an­nounced a plan to buy back its own shares. I re­mem­ber sit­ting there think­ing to my­self, “Well, if the best in­vestor in the world thinks his shares are worth buy­ing … who am I to ar­gue?”

But it gets bet­ter, be­cause at that time our dol­lar was trad­ing at record highs — one Yan­kee dol­lar for one Aussie dol­lar.

So, I took a deep breath and bought as many Berk­shire Hath­away shares as I could af­ford. And, less than seven years later, I had quadru­pled my money.

That very prof­itable ex­pe­ri­ence taught me that when the wealth­i­est in­vestor on the planet speaks, you stop what you’re do­ing and you listen.

Well, last week Buf­fett re­leased his an­nual share­holder letter, and there’s one les­son in there that we all need to take note of.

At the start of the letter each year Buf­fett usu­ally prints his very im­pres­sive track record: Over the past 53 years Berk­shire Hath­away shares have in­creased by a cu­mu­la­tive 2,404,748 per cent.

Yet this year Buf­fett did some­thing a bit un­ex­pected. He de­cided to high­light in a ta­ble the times that Berk­shire’s share price to­tally tanked.

In the ’70s his shares fell by 59 per cent. In the ’80s his shares fell by 37 per cent. In the ’90s his shares fell by 50 per cent. And in the re­cent GFC (2008) his shares fell by 50 per cent.

“This ta­ble of­fers the strong­est ar­gu­ment I can muster against ever us­ing bor­rowed money to own stocks. There is sim­ply no telling how far stocks can fall in a short pe­riod,” Buf­fett wrote. Hmmm. Right now in the US, mar­gin loans ( loans taken out to buy stocks) are at all­time highs. Much higher than at the peak of the GFC. And that’s be­fore you fac­tor in the wide­spread use of home eq­uity lines of credit to buy stocks ( peo­ple bor­row­ing against the eq­uity in their home loans) or risky funds that have in- built lever­age ( which mul­ti­plies your gains … or your losses).

Buf­fett, who is fa­mously “greedy when oth­ers are fear­ful”, has built up the big­gest amount of cash he has ever had sit­ting on the sidelines. Join the dots. The most suc­cess­ful in­vestor in his­tory is telling us that low in­ter­est rates and too much debt have pushed the prices of stocks too high. He’s been in busi­ness for 53 years and seen it all. So what’s his prediction?

“In the next 53 years our shares ( and oth­ers) will ex­pe­ri­ence de­clines re­sem­bling those in the ta­ble. No one can tell you when these will hap­pen. The light can at any time go from green to red without paus­ing at yel­low.”

Tread Your Own Path!

GOFUND MY LIFE­STYLE!

Dear Scott,

A young rel­a­tive of mine, a sin­gle mum with a one-year-old, is in such a bad state that she posted her fi­nan­cial hard­ship story on a crowd-fund­ing web­site. The only do­na­tion she got was from her own mother — which (to me) says her mum is happy for her daugh­ter to beg! She owes money for bills, a car and other things — and has even been to one of those debt com­pa­nies you see on TV that “help” you pay your bills, but to no avail.

I gen­uinely want to do some­thing, but I have learnt from try­ing to sup­port her mum over the years that you can’t help those who won’t help them­selves. So I am writ­ing to you to get some con­struc­tive ad­vice. I can’t sit by and watch her be­come home­less!

Na­dine

Hi Na­dine,

So you’re an­noyed that her mum took your hard-earned money and started wee­ing it up against the wall!

Now you’re won­der­ing if the ap­ple doesn’t fall from the tree. And you know what? You’re prob­a­bly right.

How­ever, if you gen­uinely want to help this young woman, you’re go­ing to have to re­ally con­nect with her.

So, let’s you and I look at life from her per­spec­tive.

She’s a sin­gle mother, deeply in debt, un­able to pay her bills, and now re­sort­ing to beg­ging for a buck. Trust me, she doesn’t need your judg­ment — she’ll be judg­ing her­self more harshly than you ever will. The bot­tom line is that she’s scared she’ll never get out of her sit­u­a­tion … just like her mum.

What she re­ally needs more than any­thing (much, much more than a hand­out that en­ables her bad be­hav­iour) is some­one in her cor­ner who truly be­lieves in her. Some­one who be­lieves she has what it takes to even­tu­ally dig her­self out of the hole she’s dug her­self into.

Right now she prob­a­bly be­lieves it’s a hope­less sit­u­a­tion. So take her out for coffee and show her page 189 of my book. It’s a pro­file of a sin­gle mother who I nick­named Mojo Mamma. This young mum was once all alone, with thou­sands of dol­lars in debts, and try­ing to es­cape a bad fam­ily.

It took her years of hard work, study­ing at night, and scrimp­ing and sav­ing. But she made it.

And to­day that woman is one of the strong­est peo­ple you’ll ever meet. Even bet­ter, her young son is go­ing to grow up know­ing how much of a fighter his mother is.

Now of course your sup­port and en­cour­age­ment may not work … but how amaz­ing would it be

if it does?

WE SMELL A RAT!

Dear Scott,

My wife and I des­per­ately need your help. We have been fol­low­ing your wise ad­vice for many years. We do not earn a lot (I am on $80,000 a year) but by im­ple­ment­ing your plan we have ac­cu­mu­lated $1 mil­lion in su­per, $250,000 in shares and $160,000 in sav­ings. I am 64 and want to re­tire, so I went to see a fi­nan­cial ad­viser. He rec­om­mended we take all our su­per and in­vest it in five Van­guard ETFs plus an SPDR Dow Jones Global Real Es­tate Fund. We smell a rat — do you?

Frank

Hi Frank,

Be­fore we get into sniff­ing ro­dents, first let me give you a pat on the back: on your in­come you’ve played an ab­so­lute blinder — well done, mate!

Now, I don’t know what you’ve got a whiff of, but I’m not sure if we can call it a rat just yet. See, the Van­guard ETFs (ex­change traded funds) and the SPDR (or “spi­der”) ETFs are ul­tra-low-cost in­dex funds — the fees are around 0.20 per cent, or $200 for ev­ery $100,000 in­vested. To quote fi­nan­cial rap­per Jay-Z, “I got 99 prob­lems but the fees on these ETFs ain’t one”.

That be­ing said, things might get a lit­tle pongy if the ad­viser tries to wrap in sub­stan­tial ad­min fees on top (not that I’m say­ing they will, but keep a close eye on it).

Know this: on your bal­ance, pay­ing an ad­di­tional half a per cent will end up cost­ing you an ex­tra $100,000 in fees over the next decade. Ay caramba! That’s a lot of Coronas!

Look, if you’re go­ing to in­vest your su­per in low-cost in­dex funds — and that’s a smart strat­egy — I’d sug­gest you do it via an ul­tra-low-cost in­dus­try fund. You should be able to repli­cate the ad­viser’s stated port­fo­lio for fees of less than 0.10 per cent, and un­der $100 a year in ad­min­is­tra­tion fees. Sniff, sniff! THE BARE­FOOT IN­VESTOR HOLDS AN AUS­TRALIAN FI­NAN­CIAL SER­VICES LI­CENCE ( 302081). THIS IS GEN­ERAL AD­VICE ONLY. IT SHOULD NOT RE­PLACE IN­DI­VID­UAL, IN­DE­PEN­DENT, PER­SONAL FI­NAN­CIAL AD­VICE.

The Bare­foot In­vestor: The Only Money Guide You’ll Ever Need (Wi­ley) RRP $29.95 You prob­a­bly want to pay at­ten­tion to War­ren Buf­fett, re­garded as the world’s best in­vestor.

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