Warren Buffett: How Should the Average Person Invest

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Howard Donnelly
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Warren Buffett: How Should the Average Person Invest

Post by Howard Donnelly » Mon Aug 12, 2013 10:33 am

Warren Buffett: How Should the Average Person Invest in the Stock Market
http://www.youtube.com/watch?v=NsueA-_ilxA

larryswedroe
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Re: Warren Buffett: How Should the Average Person Invest

Post by larryswedroe » Mon Aug 12, 2013 11:34 am

The first two chapters of this book are devoted to Buffett's advice to investors as well as providing lessons on learning to how to think like him!
http://www.amazon.com/Think-Invest-Like ... 961&sr=1-6

Best wishes
Larry

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EyeYield
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Re: Warren Buffett: How Should the Average Person Invest

Post by EyeYield » Mon Aug 12, 2013 11:38 am

I'm average, but I find it hard to find other people who are average. Most believe they are above average and have the commission bills to prove it.
"The stock market is a giant distraction from the business of investing." - Jack Bogle

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JoMoney
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Re: Warren Buffett: How Should the Average Person Invest

Post by JoMoney » Mon Aug 12, 2013 8:11 pm

"When I watch LeBron James jump from the free-throw line, rotate 360 degrees in the air, and dunk a basketball, I always say to myself “Now I know how to do that too!” It’s the same feeling I get from watching Warren Buffett invest. I mean, how hard could it be? As far as I can tell, all you do is make folksy pronouncements and neglect trimming your eyebrows for decades. Buffett says the market is inefficient and he has opportunities and information not available to the average person, but I haven’t been average since LeBron taught me to dunk so that’s not an issue for me." - Scott Adams
http://stream.wsj.com/story/experts-wea ... -2-204914/
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Warren Buffett: How Should the Average Person Invest

Post by nisiprius » Tue Aug 13, 2013 7:24 am

JoMoney wrote:"When I watch LeBron James jump from the free-throw line, rotate 360 degrees in the air, and dunk a basketball, I always say to myself “Now I know how to do that too!” It’s the same feeling I get from watching Warren Buffett invest. I mean, how hard could it be? As far as I can tell, all you do is make folksy pronouncements and neglect trimming your eyebrows for decades. Buffett says the market is inefficient and he has opportunities and information not available to the average person, but I haven’t been average since LeBron taught me to dunk so that’s not an issue for me." - Scott Adams
http://stream.wsj.com/story/experts-wea ... -2-204914/
Brilliant!!!!
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Warren Buffett: How Should the Average Person Invest

Post by Artsdoctor » Thu Aug 15, 2013 9:52 pm

Larry,

Your book came as a bit of a surprise! I always think of you as someone who definitely knows his way around the bond market. After Buffett's comments earlier this year that "bonds are a horrible investment," I can't think of anyone with whom you'd disagree more (regarding fixed income), let alone pen a title of a book after. The only other person who'd be even more diametrically opposed to Buffett's fixed income stance would be Bill Bernstein. In fact, Bernstein recommended on this board that investor's hold 25% of their portfolio in cash and cash-equivalents (short-term bonds); Buffett has essentially called this "dangerous."

For what it's worth, I'm going with the Swedroe philosophy. I just couldn't stomach a 95% equity portfolio at my age . . .

Artsdoctor

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Re: Warren Buffett: How Should the Average Person Invest

Post by Code Commit » Thu Aug 15, 2013 10:29 pm

Artsdoctor wrote: In fact, Bernstein recommended on this board that investor's hold 25% of their portfolio in cash and cash-equivalents (short-term bonds); Buffett has essentially called this "dangerous."
From what I have watched and read from these interviews (with Buffett) is that he has recommended holding cash up to your comfort level, instead of holding bonds and then putting the rest in equities. So, he is not saying something very different than what you quoted about Dr. Bernstein.

http://money.msn.com/now/post.aspx?post ... cd3fb33975 (watch the video interview snippet)
http://www.usatoday.com/story/money/bus ... z/2138403/

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Re: Warren Buffett: How Should the Average Person Invest

Post by Artsdoctor » Fri Aug 16, 2013 8:44 am

To make sure the comment is in context and not snippets:

http://money.msn.com/now/post.aspx?post ... cd3fb33975

To paraphrase: "To have a specific amount, 30%, 40%, 50%, in bonds is just silly." He's advocating having cash to keep you comfortable and the rest in equities. He makes it clear that he MAY buy bonds at some point (he uses the 1980s as an example of buying zeroes), but that right now, there is no value in bonds and they should be avoided (most certainly long bonds).

He has also stated elsewhere that money market funds are "some of the most dangerous investments" because of their guaranteed loss to inflation. So I'm presuming that that means you certainly don't keep 25% of your portfolio in cash.

He is a value investor and he has become rich making tactical calls. Bogleheads are hoping to keep the money they've earned by making a plan and sticking with it through thick and thin. Because we're not Buffett, we'll never be able to make those tactical calls. How can you not respect Buffett? But his investment advice goes contrary to most of ours.

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Re: Warren Buffett: How Should the Average Person Invest

Post by Swampy » Fri Aug 16, 2013 9:04 am

EyeYield wrote:
I'm average, but I find it hard to find other people who are average. Most believe they are above average and have the commission bills to prove it.
Pretty much describes me for most of my investing timeline. Only last year did I finally see the light.

I'm still stumbling along, like the guy who lived in a cave all of his life. It's tough to get used to the light after being in the dark for so long, being fed one lie after another by financial advisors and brokers.

I still find myself being lured back into the dark from time to time. After all, I'm way above average! 8-)
Last edited by Swampy on Fri Aug 16, 2013 10:08 am, edited 1 time in total.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

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Re: Warren Buffett: How Should the Average Person Invest

Post by Code Commit » Fri Aug 16, 2013 9:11 am

Artsdoctor wrote:To make sure the comment is in context and not snippets:
Aah, in context. That was the precise point I was trying to make, by giving the link to the actual interview and not saying things like "Dr. Bernstein has once stated" or "Buffett has once stated elsewhere ..".

Personally, I don't keep all non-equity in cash. I do use bonds. But that wasn't the point of my post. I was simply saying that, to assume "Dr. Bernstein must be diametrically opposed to Buffett's fixed income stance" because he recommends the investors to hold cash, does not hold water, if you listen to the complete comments by Buffett.

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Re: Warren Buffett: How Should the Average Person Invest

Post by tadamsmar » Fri Aug 16, 2013 10:41 am

Artsdoctor wrote:To make sure the comment is in context and not snippets:

http://money.msn.com/now/post.aspx?post ... cd3fb33975

To paraphrase: "To have a specific amount, 30%, 40%, 50%, in bonds is just silly." He's advocating having cash to keep you comfortable and the rest in equities. He makes it clear that he MAY buy bonds at some point (he uses the 1980s as an example of buying zeroes), but that right now, there is no value in bonds and they should be avoided (most certainly long bonds).

He has also stated elsewhere that money market funds are "some of the most dangerous investments" because of their guaranteed loss to inflation. So I'm presuming that that means you certainly don't keep 25% of your portfolio in cash.

He is a value investor and he has become rich making tactical calls. Bogleheads are hoping to keep the money they've earned by making a plan and sticking with it through thick and thin. Because we're not Buffett, we'll never be able to make those tactical calls. How can you not respect Buffett? But his investment advice goes contrary to most of ours.
So bond are horrible and money market funds are dangerous.

Is diversification good?

Can a diversified investor avoid holding a certain amount of such horrible, dangerous investments? Can he do it without timing?

Is it not a simple consequence of diversification that some of the assets you are holding will be predicted by some to be relatively bad or likely to lose money in certain periods.

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Re: Warren Buffett: How Should the Average Person Invest

Post by Artsdoctor » Fri Aug 16, 2013 10:49 am

Code Commit,

This is probably one of those confusing Rorschach tests. We both see different things with the same picture.

Because of Buffett's multi-billion dollar investments, he must hold T-bills for liquidity. But he holds his nose while doing it; it's a necessary evil. I don't see that as holding a substantial amount in fixed income for him, but I could be wrong. Forget the pundits, but if you want to go directly to the source, you'll find his reasoning, in his words, here:

http://finance.fortune.cnn.com/2012/02/ ... er-letter/

"Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge."

I'm not sure how else to interpret his words. The last two sentences to me seem pretty straightforward.

Artsdoctor

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Re: Warren Buffett: How Should the Average Person Invest

Post by samboise » Fri Aug 16, 2013 10:55 am

He clearly says that if you are getting your stuff from the talking heads on TV you are better off investing in an index fund. I agree.

The interviewer staring off saying "playing the stock market" set the tone to this interview! Then asking him if he believed in Efficient Markets!?

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Re: Warren Buffett: How Should the Average Person Invest

Post by Code Commit » Fri Aug 16, 2013 11:54 am

Artsdoctor wrote:This is probably one of those confusing Rorschach tests. We both see different things with the same picture.
:D I suppose so, but I think we might have more in common in our actions (i.e. how we actually invest vs the posts above)
Artsdoctor wrote: "Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge."

I'm not sure how else to interpret his words. The last two sentences to me seem pretty straightforward.
That one is easy to interpret if you know the caveat - the definition of risk. I or you would call money-market, bonds, bank deposits less risky because our definition of risk is volatility, which is different from his definition (mentioned earlier in your link - "probability of loss of purchasing power over a contemplated holding period"). So, of course, if "risk" means two different things, then one can call it "huge" and the other can call it "low".

The beauty is that we can read from all the experts (Bogle, Swedroe, Bernstein, Ferri, Taylor or Buffett or anyone else) and we don't have to agree 100% with every statement that they have ever made. My IPS does not say "Invest like person X". I agree with all of them and buy index funds, I beg to differ from Bogle when I buy good chunk of International & small, I don't buy CCF despite my admiration for Swedroe, and I do invest in TBM & not just cash or short term treasuries for fixed income portion, despite what Buffett or Bernstein have to say about it.

Peace.

PS: I don't own a single share of BRK. I invest via index funds. I am an average investor.

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Re: Warren Buffett: How Should the Average Person Invest

Post by dbr » Fri Aug 16, 2013 12:02 pm

I don't know why it is so hard to see that there are many different kinds of risk.

Inevitably there seems to be a discussion that risk is this and not that, etc., when in fact there are different ways that there can be uncertainty and different ways that bad things can happen. Any of the competent books on investing will lay out a pretty good discussion of those things right up front.

Maybe the problem is that darned MPT where they insist on using the word "expected" for average and the word "risk" for variability. Are they thinking that this stuff is so esoteric and unknown to anyone except academic economists that no one who would be confused is ever going to see it?

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Re: Warren Buffett: How Should the Average Person Invest

Post by Twins Fan » Fri Aug 16, 2013 12:02 pm

Artsdoctor wrote:To make sure the comment is in context and not snippets:

http://money.msn.com/now/post.aspx?post ... cd3fb33975

To paraphrase: "To have a specific amount, 30%, 40%, 50%, in bonds is just silly." He's advocating having cash to keep you comfortable and the rest in equities. He makes it clear that he MAY buy bonds at some point (he uses the 1980s as an example of buying zeroes), but that right now, there is no value in bonds and they should be avoided (most certainly long bonds).

He has also stated elsewhere that money market funds are "some of the most dangerous investments" because of their guaranteed loss to inflation. So I'm presuming that that means you certainly don't keep 25% of your portfolio in cash.

He is a value investor and he has become rich making tactical calls. Bogleheads are hoping to keep the money they've earned by making a plan and sticking with it through thick and thin. Because we're not Buffett, we'll never be able to make those tactical calls. How can you not respect Buffett? But his investment advice goes contrary to most of ours.
I take that to mean he thinks of cash as different than a money market fund. Many of us would consider them the same, as in a savings account either way. But, I think he means there if people consider a money market fund part of their portfolio just as a bond fund would be.

My take on it is that Buffett is saying be 100% equities in your investing portfolio and then keep enough cash in savings to let you sleep at night. But, the cash is separate.

Just my take on it.

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Re: Warren Buffett: How Should the Average Person Invest

Post by FafnerMorell » Fri Aug 16, 2013 12:12 pm

I'd be real curious how many people have become multi-billionaires by thinking/investing like Warren Buffet. Offhand, there's 1 (WB himself), so out of 6+ billion folks, the odds of getting really rich by following that advice seem pretty poor. However, there seem to be a couple of hundred authors offering various Buffet-inspired investment books, and they must make at least a decent buck fleecing the sheep, so perhaps there's a market for a book on "How to Make Money By Exploiting Warren Buffet's Name in the Investment Community" (at least the odds on that are better). Or maybe some variety with a "Breaking Central Banks for Fun & Profit by Investing like George Soros"

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