Another Warren Buffett S&P 500 Recommendation

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JoMoney
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Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Tue Apr 24, 2018 7:48 pm

A new interview with Warren Buffett was posted over at Yahoo! , doesn't answer all the questions people pose regarding "Why the S&P?", but he does elaborate on his opinion, even disregarding Target Date and 'Smart' funds
https://finance.yahoo.com/news/warren-b ... 40222.html
... The S&P 500 index is the one to use, it's the one I used in that bet I made for ten years, it's the one I've told the trustee for my wife to put 90% of the funds I leave her into. The S&P 500 is 80% of the market value of everything you can buy in this country, it's over 20trillion, you're buying America.
... America is a powerful economic machine that since 1776 has worked and it's going to keep working. ...now you don't want to buy with the idea you can sell it in two years, or three years necessarily and make money, you could lose money that way. But if you buy it for 10, 20, just keep buying the S&P 500 index and forget about all the other nonsense being sold to you, because I guarantee you one thing about the stuff being sold to you, it will carry bigger fees than what I'm talking about.

Q: ... and there's no reason to think ... that same sort of process or returns won't happen starting from right now?

The S&P 500 companies have earned well over 10% on equity, often 15% annually, for years and years and years, they've done it with democrat administrations with republican administrations. Now you get money compounding at that kind of rate underlying your investment and you get a diverisifed group of that... I mean, you're going to do well.
"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: Another Warren Buffett S&P 500 Recommendation

Post by snarlyjack » Tue Apr 24, 2018 8:00 pm

JoMoney,

That was great...Thanks for post it.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by MrPotatoHead » Tue Apr 24, 2018 8:02 pm

Love it!!!!

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Re: Another Warren Buffett S&P 500 Recommendation

Post by nisiprius » Tue Apr 24, 2018 8:05 pm

JoMoney, reporting what Warren Buffett said wrote:...just keep buying the S&P 500 index and forget about all the other nonsense being sold to you, because I guarantee you one thing about the stuff being sold to you, it will carry bigger fees than what I'm talking about...
Typical Buffett. I wonder if he means to leave open questions just to annoy people...

He said what he said. And his "80%" remark makes it perfectly clear that he knows the S&P 500 is not the total market. I can't read his mind, and neither can anyone else. I don't know why he thinks I should buy "80% of the market value of everything you can buy in this country, it's over $20 trillion, you're buying America" when for the same price I can buy >99% of the market value of everything you can buy in this country, it's over $25 trillion, I'm buying even more of America.

(And don't get me started on stocks = "everything you can buy in this country.")

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Re: Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Tue Apr 24, 2018 8:08 pm

^ Yes. It would be nice, if he would just say, as I suspect that he would, 'sure' the Vanguard Total Stock Market is practically the same thing.
Ben Stein interviewing Warren Buffett wrote: http://archive.fortune.com/2010/10/18/p ... /index.htm
What should a typical upper-middle-class person in the U.S. buy to prepare for retirement?

"Equities," Buffett answers without a moment's hesitation.

"The VTI?" I ask.

"That's good enough... (continues with some other possible recommendation regarding dividend stocks, then dismisses that)
"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: Another Warren Buffett S&P 500 Recommendation

Post by nedsaid » Tue Apr 24, 2018 9:53 pm

The S&P 500 is regarded as America's blue-chip index. 500 of the largest and most successful companies in the United States. Who wouldn't want to own such an investment? My largest holding is in the US Total Stock Market Index, of which the S&P 500 makes up 75% of it's market capitalization. The two indexes are largely similar. I prefer to own the Mid-Caps and Small-Caps too and thus favor Total Stock Market.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by gmaynardkrebs » Tue Apr 24, 2018 11:10 pm

Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....

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Re: Another Warren Buffett S&P 500 Recommendation

Post by alpine_boglehead » Tue Apr 24, 2018 11:39 pm

nisiprius wrote:
Tue Apr 24, 2018 8:05 pm
He said what he said. And his "80%" remark makes it perfectly clear that he knows the S&P 500 is not the total market. I can't read his mind, and neither can anyone else. I don't know why he thinks I should buy "80% of the market value of everything you can buy in this country, it's over $20 trillion, you're buying America" when for the same price I can buy >99% of the market value of everything you can buy in this country, it's over $25 trillion, I'm buying even more of America.
Yes, it's annoying, but here's a simple guess: The mundane reason for just mentioning the S&P 500 is probably that this is the most well-known index. And it's the world that Buffett lives in ... Berkshire's performance is measured against US large cap.

There's lots and lots of S&P 500 index funds (I as a European couldn't even find a Europe-domiciled equivalent of TSM, but tons of S&P 500 funds). But it wouldn't hurt if such a popular speaker as Buffett made Total Stock Market more widely known.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by stemikger » Wed Apr 25, 2018 2:53 am

This is great. Thanks for posting.

I see most people are getting hung up on why he chooses the S&P over the Total Stock Market Index. That never bothered me because the returns are practically identical.

The one thing that put my investing life in a tail spin on how he has everyone 90% in equities even in retirement. I know he did not say that in this interview but if you go on You Tube, Warren calls bonds a terrible and dangerous investment and tells everyone he knows that are not necessarily rich people, just regular folks to simply hold the S&P Index and let America do the work and hold 10% in treasuries to feel secure.

I'm not sure how many retirees can be so aggressive. So let's say the average working guy who was diligent with his savings but was never a huge earner managed to save one million, 10% would be 100K in treasures to feel secure (which is Buffett's advice). Would 100K help me feel secure if I saw my 900K go down by half when I'm my 70s.

Right now I am taking Jack's advice and holding 60/40 for life, but I'm sure Warren's advice will be better for my daughter when I'm gone.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by TheoLeo » Wed Apr 25, 2018 3:49 am

His wife will most likely inherit enough (if she really lives longer than buffett) that even a 90% decline of her portfolio value would not affect her every day life. There is no reason why Buffett would leave her with the slightest chance of getting into financial trouble. The 10% in treasuries covers her expenses for 50 years and the remaining 90% in the s&p will be donated to a charitable foundation with an investment period of forever after she passes away. This way, it is actually the money in the S&P that is for safety. The risky move would be to directly donate this money to his or the gates foundation.

Just guessing here, of course.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Wed Apr 25, 2018 4:12 am

TheoLeo wrote:
Wed Apr 25, 2018 3:49 am
His wife will most likely inherit enough (if she really lives longer than buffett) that even a 90% decline of her portfolio value would not affect her every day life. There is no reason why Buffett would leave her with the slightest chance of getting into financial trouble. The 10% in treasuries covers her expenses for 50 years and the remaining 90% in the s&p will be donated to a charitable foundation with an investment period of forever after she passes away. This way, it is actually the money in the S&P that is for safety. The risky move would be to directly donate this money to his or the gates foundation.

Just guessing here, of course.
Not sure what you mean, he is directly donating the bulk of his wealth (BRK stock) to the Gates foundation, and has been doing so for several years:
http://fortune.com/2017/07/10/warren-bu ... oundation/
He's never really said how much of his assets will be left for his wife, but the bulk of his current wealth was pledged to be given away.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by TheoLeo » Wed Apr 25, 2018 5:00 am

Yes I know that he has already donated the bulk of his wealth. A remaining fraction however will be passed on to his wife. This fraction will be allocated 90/10 S&P500 to treasuries, correct? So now I try to figure out his reasining behind this asset allocation. And my guess is, that he doesn´t count on a SWR of 4% to get his wife through retirement but that he will leave a gigantic margin of safety. So gigantic, that she will sail gracefully through retirement on her 10% in treasuries alone. But since Warren is a nice guy, he leaves her with 10x as much as she actually needs. Just in case. However, this extra pillow of safety is allocated purely to an S&P500, because most likely she will not need this money in the next 20 years and he still wants this money to appreciate in value so it can be put to good use in his foundation after she passes.

All I am saying is, that he invests like a philanthropist, not like someone protecting a nest egg.

Edit: Just to be clear again: These are all assumptions that make sense to me. But of course it is possible that his wife is left with 2 million and depends on a 4% SWR and Buffett thinks 90/10 is the way to go.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by nisiprius » Wed Apr 25, 2018 5:41 am

alpine_boglehead wrote:
Tue Apr 24, 2018 11:39 pm
...Yes, it's annoying, but here's a simple guess: The mundane reason for just mentioning the S&P 500 is probably that this is the most well-known index. And it's the world that Buffett lives in ... Berkshire's performance is measured against US large cap.

There's lots and lots of S&P 500 index funds (I as a European couldn't even find a Europe-domiciled equivalent of TSM, but tons of S&P 500 funds). But it wouldn't hurt if such a popular speaker as Buffett made Total Stock Market more widely known...
Everyone has their "simple guesses" but nobody knows. It wouldn't take Buffett very long to explain; he wouldn't necessarily have to do it in his main sound bite. As it is, people place huge amounts of weight on the statements he makes because of his status as a fabulously successful investor/businessman, and many people believe that Warren Buffett makes the following specific recommendations for ordinary retail investors and retirement savers:

a) Large-caps (and the few stray mid-caps in the S&P 500) only.
b) US only.
c) Stocks for 90% to 100% of your portfolio, few or no bonds of any kind, not even TIPS.

And he always makes them with clear, punchy, intensity. There are no qualifications or explanations. Nobody knows whether he really means "do not ever buy an international stock fund, period" or whether he means something like what John C. Bogle says--darn it, I can never find an exact quotation, but he says something like "I don't think you need international stocks and I don't invest in them myself, but if you want them, fine. But I suggest limiting your holdings to 20% of your stocks." John C. Bogle's statements are never doctrinaire. Warren Buffett's statements always are.

Furthermore, Bogle's statements, whether you think they are right or wrong, are always backed by data and explanations; a whole chapter of Common Sense on Mutual Funds is devoted to explaining his views on international stock investing. Buffett's are not. "Indeed, who has ever benefited during the past 238 years by betting against America?" is not an explanation.

Nobody knows if he Buffett means "Use an S&P 500 fund, it's good enough, keep it simple" or if he means "Use an S&P 500 fund in preference to a total stock market fund."
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Re: Another Warren Buffett S&P 500 Recommendation

Post by Lauretta » Wed Apr 25, 2018 7:16 am

gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
I agree. (Though to be fair he has in the past evoked interest rates and the idea that 'stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates' (as in the FED model viewtopic.php?t=245036 ))
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Re: Another Warren Buffett S&P 500 Recommendation

Post by ignition » Wed Apr 25, 2018 9:01 am

TheoLeo wrote:
Wed Apr 25, 2018 5:00 am
Yes I know that he has already donated the bulk of his wealth. A remaining fraction however will be passed on to his wife. This fraction will be allocated 90/10 S&P500 to treasuries, correct? So now I try to figure out his reasining behind this asset allocation. And my guess is, that he doesn´t count on a SWR of 4% to get his wife through retirement but that he will leave a gigantic margin of safety. So gigantic, that she will sail gracefully through retirement on her 10% in treasuries alone. But since Warren is a nice guy, he leaves her with 10x as much as she actually needs. Just in case. However, this extra pillow of safety is allocated purely to an S&P500, because most likely she will not need this money in the next 20 years and he still wants this money to appreciate in value so it can be put to good use in his foundation after she passes.

All I am saying is, that he invests like a philanthropist, not like someone protecting a nest egg.

Edit: Just to be clear again: These are all assumptions that make sense to me. But of course it is possible that his wife is left with 2 million and depends on a 4% SWR and Buffett thinks 90/10 is the way to go.
Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR: https://www.investopedia.com/articles/p ... -sound.asp

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Re: Another Warren Buffett S&P 500 Recommendation

Post by dbr » Wed Apr 25, 2018 9:13 am

ignition wrote:
Wed Apr 25, 2018 9:01 am


Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR: https://www.investopedia.com/articles/p ... -sound.asp
It is indeed true that SWR studies do not prove that high stock allocations are risky to retirement income. However, it is generally also the case that much lower stock allocations are not worse or may even be slightly better. Probably within the error bars on those things there is no loss or gain in safety between moderate and high stock allocations. What high stock allocation do in the retirement scenario is produce much higher expected wealth at death and a much larger uncertainty in what the wealth at death will be. The extreme opposite would be an SPIA which does not fail to produce income at any age but also has 100% certainty of the wealth at death, namely that it will be zero.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by gmaynardkrebs » Wed Apr 25, 2018 9:20 am

ignition wrote:
Wed Apr 25, 2018 9:01 am
TheoLeo wrote:
Wed Apr 25, 2018 5:00 am
Yes I know that he has already donated the bulk of his wealth. A remaining fraction however will be passed on to his wife. This fraction will be allocated 90/10 S&P500 to treasuries, correct? So now I try to figure out his reasining behind this asset allocation. And my guess is, that he doesn´t count on a SWR of 4% to get his wife through retirement but that he will leave a gigantic margin of safety. So gigantic, that she will sail gracefully through retirement on her 10% in treasuries alone. But since Warren is a nice guy, he leaves her with 10x as much as she actually needs. Just in case. However, this extra pillow of safety is allocated purely to an S&P500, because most likely she will not need this money in the next 20 years and he still wants this money to appreciate in value so it can be put to good use in his foundation after she passes.

All I am saying is, that he invests like a philanthropist, not like someone protecting a nest egg.

Edit: Just to be clear again: These are all assumptions that make sense to me. But of course it is possible that his wife is left with 2 million and depends on a 4% SWR and Buffett thinks 90/10 is the way to go.
Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR: https://www.investopedia.com/articles/p ... -sound.asp
I wonder what the historical data would have predicted for a 90/10 allocation for a 50 year old near retiree in 1928.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by dbr » Wed Apr 25, 2018 9:22 am

gmaynardkrebs wrote:
Wed Apr 25, 2018 9:20 am
ignition wrote:
Wed Apr 25, 2018 9:01 am
TheoLeo wrote:
Wed Apr 25, 2018 5:00 am
Yes I know that he has already donated the bulk of his wealth. A remaining fraction however will be passed on to his wife. This fraction will be allocated 90/10 S&P500 to treasuries, correct? So now I try to figure out his reasining behind this asset allocation. And my guess is, that he doesn´t count on a SWR of 4% to get his wife through retirement but that he will leave a gigantic margin of safety. So gigantic, that she will sail gracefully through retirement on her 10% in treasuries alone. But since Warren is a nice guy, he leaves her with 10x as much as she actually needs. Just in case. However, this extra pillow of safety is allocated purely to an S&P500, because most likely she will not need this money in the next 20 years and he still wants this money to appreciate in value so it can be put to good use in his foundation after she passes.

All I am saying is, that he invests like a philanthropist, not like someone protecting a nest egg.

Edit: Just to be clear again: These are all assumptions that make sense to me. But of course it is possible that his wife is left with 2 million and depends on a 4% SWR and Buffett thinks 90/10 is the way to go.
Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR: https://www.investopedia.com/articles/p ... -sound.asp
I wonder what the historical data would have predicted for a 90/10 allocation for a 50 year old near retiree in 1928.
That scenario can be found in the output of FireCalc and compared to other years.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by ignition » Wed Apr 25, 2018 9:27 am

gmaynardkrebs wrote:
Wed Apr 25, 2018 9:20 am
I wonder what the historical data would have predicted for a 90/10 allocation for a 50 year old near retiree in 1928.
You can check it using cFiresim. Apparently 1929 was worse than 1928: an investor would have about 270K remaining if he started with 1M after 30 years.

It's funny what a difference a few years make. If you started in 1927 you would end up with over 4M!

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Re: Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Wed Apr 25, 2018 9:37 am

gmaynardkrebs wrote:
Wed Apr 25, 2018 9:20 am
ignition wrote:
Wed Apr 25, 2018 9:01 am
... I wonder what the historical data would have predicted for a 90/10 allocation for a 50 year old near retiree in 1928.
PortfolioVisualizer.com allows you to import data sets going back further than the defaults, but you can't share the links to the results. Also, for some reason I can't get it to start prior to January 1930 even if the data imported goes back before then.
Here's the results of a 90/10 (U.S. Stocks / 30day TBills) starting with a balance of $12,000 and withdrawing $40 a month (4% of initial balance). The start is from Jan-1930 just before the big drop and goes out 30 years:

Using inflation adjusted returns on stocks / 30day TBills
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Using nominal returns on stocks / 30day TBills
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Re: Another Warren Buffett S&P 500 Recommendation

Post by MnD » Wed Apr 25, 2018 9:39 am

MrPotatoHead wrote:
Tue Apr 24, 2018 8:02 pm
Love it!!!!
Other than a showcase for confirmation bias, I'm not sure what's so great about a recommendation to invest single country, large cap and virtually all equity. If Mr. Buffett or Mr. Bogle turn out to be wrong regarding their US-centric view of investing, are they going to reimburse their adherents for losses or the difference between what they might have earned in a more diversified approach to investing?

The trouble with mixing your money with appeal to authority is that even the great ones can be very wrong.

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"Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications."

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Re: Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Wed Apr 25, 2018 9:50 am

MnD wrote:
Wed Apr 25, 2018 9:39 am
...The trouble with mixing your money with appeal to authority is that even the great ones can be very wrong. ...
That's certainly true. Look at all the people who invested in international stocks over the past decade+, following advice based on"Efficient Frontier" charts and what-not, and haven't seen any benefit from it.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by ignition » Wed Apr 25, 2018 9:52 am

MnD wrote:
Wed Apr 25, 2018 9:39 am
If Mr. Buffett or Mr. Bogle turn out to be wrong regarding their US-centric view of investing, are they going to reimburse their adherents for losses or the difference between what they might have earned in a more diversified approach to investing?
If you turn out to be wrong regarding your diversified approach of investing, are you going to reimburse your adherents for losses or the difference between what they might have earned in a more US-centric view approach to investing? :P

(just kidding, i also hold a more diversified portfolio but still no one knows for sure what might be best)

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Re: Another Warren Buffett S&P 500 Recommendation

Post by MnD » Wed Apr 25, 2018 9:59 am

ignition wrote:
Wed Apr 25, 2018 9:52 am
MnD wrote:
Wed Apr 25, 2018 9:39 am
If Mr. Buffett or Mr. Bogle turn out to be wrong regarding their US-centric view of investing, are they going to reimburse their adherents for losses or the difference between what they might have earned in a more diversified approach to investing?
If you turn out to be wrong regarding your diversified approach of investing, are you going to reimburse your adherents for losses or the difference between what they might have earned in a more US-centric view approach to investing? :P

(just kidding, i also hold a more diversified portfolio but still no one knows for sure what might be best)
I doubt an anonymous poster on a discussion board has any adherents versus individuals like Mr. Buffett and Mr. Bogle whose communications do translate for some to actionable investment decisions. I also don't think global cap market proponents believe their allocation will be "best". There will always be single and subsets of countries that significantly outperform global equity returns. I'm happy with the return that the haystack provides versus betting and speculating on a single country having an adequate, better (or best) outcome.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by gmaynardkrebs » Wed Apr 25, 2018 10:03 am

ignition wrote:
Wed Apr 25, 2018 9:52 am
MnD wrote:
Wed Apr 25, 2018 9:39 am
If Mr. Buffett or Mr. Bogle turn out to be wrong regarding their US-centric view of investing, are they going to reimburse their adherents for losses or the difference between what they might have earned in a more diversified approach to investing?
If you turn out to be wrong regarding your diversified approach of investing, are you going to reimburse your adherents for losses or the difference between what they might have earned in a more US-centric view approach to investing? :P

(just kidding, i also hold a more diversified portfolio but still no one knows for sure what might be best)
I'm sure Buffet means well and is not a pretentious person at all, but I think being that rich has made him a little out of touch and cavalier about giving investing advice to common folk, and i wish he would stop. I think BHers do see the risks in a 90/10 portfolio and can make their own judgments accordingly, but I'm not so sure about all the Moms, Pops & Aunt Gladys' out there, who may be flying without a safety net beneath them.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by chevca » Wed Apr 25, 2018 10:46 am

The Moms, Pops, and Aunt Glady's out there likely don't even know who Buffett or Bogle are.... let alone seek out their advice on invest. If they're even saving and investing, it would be surprising.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by nisiprius » Wed Apr 25, 2018 10:59 am

ignition wrote:
Wed Apr 25, 2018 9:01 am
...Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR...
Depends on whom you ask.

Vanguard's Monte Carlo simulator is showing me 12% failure rate at 90/10, 9% at 60/40. It really is a Monte Carlo simulator so the result will vary slightly each time, but not much.

But it's nonsense anyway, unless you have already decided in advance that you are happy with a 12% failure rate. This is a big problem with SWR calculations. Obviously, as you increase your withdrawal rate, your failure rate will increase, but your lowest-of-the-the-high failure rates will shift toward stocks. You really need to begin, as always, with your risk tolerance. First decide on the failure rate that is acceptable to you. Then, instead of varying stock allocation and watching failure rate, hold failure rate constant and vary stock allocation to find the highest withdrawal rate. You can "prove stocks are safer" by being aggressive about your withdrawal rate. If you are really aggressive, you can opt for a 50% withdrawal rate and "prove" that the lowest failure rate is obtained with an allocation of 100% lottery tickets, because 100% stocks-bonds-and-cash will give you a 100.000% historic failure rate, while 100% lottery tickets will give you failure rate that is "lower than 100.000%." Maybe 99.9%, but lower than 100.000%.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by Leesbro63 » Wed Apr 25, 2018 11:10 am

I think Buffett’s continual reference to “the S&P500” is generational. But can be understood to be Vanguard Total Market. It’s like how older people refer to “Hospitalization” (health insurance) “Stewardess” (flight attendant) and “trousers”.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Wed Apr 25, 2018 11:35 am

I like to think he doesn't suggest the Total Market index as a snub to the "efficient market" crowd... or perhaps homage to Ben Graham's advice on stock selection for a defensive/passive investor, which would exclude small-caps.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by heyyou » Wed Apr 25, 2018 11:49 am

Years ago, Buffett said his widow would get his cash holdings, when all of his shares of BRK stock went to the Gates Foundation. I've forgotten the single digit % that was mentioned as his cash, but when it was multiplied times a then recently published Forbes magazine number for his wealth, it was between $100-200 million. The widow can live on the interest and dividends from that many index shares. She is in her early 60s.

The 90/10 is not a precisely calculated retirement spending allocation for those of us spending from a 6 or low 7 digit portfolio. 90/10 outperforms 100% stocks when assuming some bond fund shares will be sold when rebalancing after stock market crashes. A multi-billionaire's allocation for his widow, is interesting but is not investing advice. By publishing the allocation, there is no doubt about how the trustees are required to invest for the widow, so no high-fee funds from their golf partners.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by ignition » Wed Apr 25, 2018 11:55 am

nisiprius wrote:
Wed Apr 25, 2018 10:59 am
ignition wrote:
Wed Apr 25, 2018 9:01 am
...Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR...
Depends on whom you ask.

Vanguard's Monte Carlo simulator is showing me 12% failure rate at 90/10, 9% at 60/40. It really is a Monte Carlo simulator so the result will vary slightly each time, but not much.
I don't think there is a meaningful difference between 9 or 12%. I you extend the monte carlo simulation with a few years to 34 years, 60/40 also has a probability of 12% to fail. So too bad if you live a few years longer than planned. Also weird how 20/80 only has a probability of 12% to fail while historically it would have failed in 30% of the 30 year time periods with a median value of only 200K at the end of the period according to cFiresim. I think its useful to look at both the monte carlo simulation and how it behaved in reality historically.
nisiprius wrote:
Wed Apr 25, 2018 10:59 am
But it's nonsense anyway, unless you have already decided in advance that you are happy with a 12% failure rate. This is a big problem with SWR calculations. Obviously, as you increase your withdrawal rate, your failure rate will increase, but your lowest-of-the-the-high failure rates will shift toward stocks. You really need to begin, as always, with your risk tolerance. First decide on the failure rate that is acceptable to you. Then, instead of varying stock allocation and watching failure rate, hold failure rate constant and vary stock allocation to find the highest withdrawal rate. You can "prove stocks are safer" by being aggressive about your withdrawal rate. If you are really aggressive, you can opt for a 50% withdrawal rate and "prove" that the lowest failure rate is obtained with an allocation of 100% lottery tickets, because 100% stocks-bonds-and-cash will give you a 100.000% historic failure rate, while 100% lottery tickets will give you failure rate that is "lower than 100.000%." Maybe 99.9%, but lower than 100.000%.
Interesting comparison :p. But I'm hoping stocks aren't lottery tickets.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by Glockenspiel » Wed Apr 25, 2018 12:05 pm

I know people are hung up on the S&P 500 index recommendation when he could mention the Total Stock Market index, but I think he does it for simplicity’s sake. Most people, even unsophisticated investors, recognize the S&P 500. He believes that people look to him to provide investment guidance for the people of America and he is trying to do it in a way that the most people will understand.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by gmaynardkrebs » Wed Apr 25, 2018 12:09 pm

nisiprius wrote:
Wed Apr 25, 2018 10:59 am
ignition wrote:
Wed Apr 25, 2018 9:01 am
...Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR...
Depends on whom you ask.

Vanguard's Monte Carlo simulator is showing me 12% failure rate at 90/10, 9% at 60/40. It really is a Monte Carlo simulator so the result will vary slightly each time, but not much.

But it's nonsense anyway, unless you have already decided in advance that you are happy with a 12% failure rate. This is a big problem with SWR calculations. Obviously, as you increase your withdrawal rate, your failure rate will increase, but your lowest-of-the-the-high failure rates will shift toward stocks. You really need to begin, as always, with your risk tolerance. First decide on the failure rate that is acceptable to you. Then, instead of varying stock allocation and watching failure rate, hold failure rate constant and vary stock allocation to find the highest withdrawal rate. You can "prove stocks are safer" by being aggressive about your withdrawal rate. If you are really aggressive, you can opt for a 50% withdrawal rate and "prove" that the lowest failure rate is obtained with an allocation of 100% lottery tickets, because 100% stocks-bonds-and-cash will give you a 100.000% historic failure rate, while 100% lottery tickets will give you failure rate that is "lower than 100.000%." Maybe 99.9%, but lower than 100.000%.
Very thoughtful analysis and helpful to me as far as grappling with this. Another problem I have with the MC/SWR calculators that there is "failure" and there is "FAILURE." That didn't really pop out at me at first. When I first started playing with the Monte Carlo sims, when I saw a 12% failure rate, I said great, 88% of the time I should win, and 12% of the time I lose. Sounded pretty good. It took me a while to figure out that an 88% "success" rate didn't mean that, at worst, I'd only fall short of what I needed by like, 12%. In fact, for some of the "fail" scenarios, I would be down by 40% or worse. Worse yet, I discovered that longer into the future, the worse the magnitude of really bad failures got, even though on average (ie, mean) I was "almost certain" to do better. Obviously, I have no statistics background, but I wonder if how many other people like me use these tools without really understanding what they mean.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by ignition » Wed Apr 25, 2018 12:19 pm

gmaynardkrebs wrote:
Wed Apr 25, 2018 12:09 pm
.... In fact, for some of the "fail" scenarios, I would be down by 40% or worse....
What do you mean with this? Failure means that the portfolio went down 100%, ie there is 0 left.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by Glockenspiel » Wed Apr 25, 2018 12:28 pm

ignition wrote:
Wed Apr 25, 2018 12:19 pm
gmaynardkrebs wrote:
Wed Apr 25, 2018 12:09 pm
.... In fact, for some of the "fail" scenarios, I would be down by 40% or worse....
What do you mean with this? Failure means that the portfolio went down 100%, ie there is 0 left.
I understand that 100% failure means the portfolio went down 100%, but if a real life person were to approach that situation, their spending behavior would appropriately change, too. The problem with statistics and Monte Carlo simulations is that they don't take human behavior into consideration.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by blindguardian » Wed Apr 25, 2018 12:33 pm

From looking at the investment options of some 401k's and HSA's, it seems like if they offer Vanguard index funds, it's usually the S&P 500 index fund and not the Total Stock Market fund. I don't know why this is, and maybe my sample size is too small. But if it's true that TSM isn't offered in many places, then maybe it's better that Buffet is pushing the S&P so that when the average non-Boglehead is trying to pick investments in her retirement account, she'll remember that Buffet recommended the S&P 500 index fund.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by TheoLeo » Wed Apr 25, 2018 12:43 pm

nisiprius wrote:
Wed Apr 25, 2018 10:59 am
ignition wrote:
Wed Apr 25, 2018 9:01 am
...Historically, the 90/10 allocation has one of the lowest failure rates with a 4% SWR...
Depends on whom you ask.

Vanguard's Monte Carlo simulator is showing me 12% failure rate at 90/10, 9% at 60/40. It really is a Monte Carlo simulator so the result will vary slightly each time, but not much.

But it's nonsense anyway, unless you have already decided in advance that you are happy with a 12% failure rate. This is a big problem with SWR calculations. Obviously, as you increase your withdrawal rate, your failure rate will increase, but your lowest-of-the-the-high failure rates will shift toward stocks. You really need to begin, as always, with your risk tolerance. First decide on the failure rate that is acceptable to you. Then, instead of varying stock allocation and watching failure rate, hold failure rate constant and vary stock allocation to find the highest withdrawal rate. You can "prove stocks are safer" by being aggressive about your withdrawal rate. If you are really aggressive, you can opt for a 50% withdrawal rate and "prove" that the lowest failure rate is obtained with an allocation of 100% lottery tickets, because 100% stocks-bonds-and-cash will give you a 100.000% historic failure rate, while 100% lottery tickets will give you failure rate that is "lower than 100.000%." Maybe 99.9%, but lower than 100.000%.

Image
Image
Thats a cool tool! Thanks for sharing. What I conclude from playing with it for a while is that bonds are useless and Buffett is right with his 90/10 :P

If you accept a failure rate of >0% and <5% within 30 years (by setting the respective WR), then adding bonds doesn´t do much more than reducing the early failure risk a little and increasing the failure risk a little if you happen to live longer than 30 years. So that is simply a trade-off. However, adding bonds decreases your upside potential a LOT.

In other words: The stock/bond allocation doesn´t meaningfully affect your SWR if you are going for a sensible failure propability.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by lostdog » Wed Apr 25, 2018 1:27 pm

MnD wrote:
Wed Apr 25, 2018 9:59 am
ignition wrote:
Wed Apr 25, 2018 9:52 am
MnD wrote:
Wed Apr 25, 2018 9:39 am
If Mr. Buffett or Mr. Bogle turn out to be wrong regarding their US-centric view of investing, are they going to reimburse their adherents for losses or the difference between what they might have earned in a more diversified approach to investing?
If you turn out to be wrong regarding your diversified approach of investing, are you going to reimburse your adherents for losses or the difference between what they might have earned in a more US-centric view approach to investing? :P

(just kidding, i also hold a more diversified portfolio but still no one knows for sure what might be best)
I doubt an anonymous poster on a discussion board has any adherents versus individuals like Mr. Buffett and Mr. Bogle whose communications do translate for some to actionable investment decisions. I also don't think global cap market proponents believe their allocation will be "best". There will always be single and subsets of countries that significantly outperform global equity returns. I'm happy with the return that the haystack provides versus betting and speculating on a single country having an adequate, better (or best) outcome.
+1
I don't invest looking in the rear view mirror and I know absolutely nothing about the future. I invest in Vanguard Total World Stock Index.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by MnD » Wed Apr 25, 2018 1:30 pm

Leesbro63 wrote:
Wed Apr 25, 2018 11:10 am
I think Buffett’s continual reference to “the S&P500” is generational. But can be understood to be Vanguard Total Market. It’s like how older people refer to “Hospitalization” (health insurance) “Stewardess” (flight attendant) and “trousers”.
Not to mention that Vanguard Total Stock Market Fund is very ambiguous, unlike Total World Stock Fund or Total International Stock Fund.
If Vanguard had a do-over I'll bet they would have named it Total US Stock Fund.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by ignition » Wed Apr 25, 2018 1:51 pm

MnD wrote:
Wed Apr 25, 2018 9:59 am
I doubt an anonymous poster on a discussion board has any adherents versus individuals like Mr. Buffett and Mr. Bogle whose communications do translate for some to actionable investment decisions. I also don't think global cap market proponents believe their allocation will be "best". There will always be single and subsets of countries that significantly outperform global equity returns. I'm happy with the return that the haystack provides versus betting and speculating on a single country having an adequate, better (or best) outcome.
Sure, but it probably won't matter that much for US investors.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by 3funder » Wed Apr 25, 2018 2:32 pm

gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
Exactly. I take issue with very few things he says; this is one of them.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by pascalwager » Wed Apr 25, 2018 2:34 pm

blindguardian wrote:
Wed Apr 25, 2018 12:33 pm
From looking at the investment options of some 401k's and HSA's, it seems like if they offer Vanguard index funds, it's usually the S&P 500 index fund and not the Total Stock Market fund. I don't know why this is, and maybe my sample size is too small. But if it's true that TSM isn't offered in many places, then maybe it's better that Buffet is pushing the S&P so that when the average non-Boglehead is trying to pick investments in her retirement account, she'll remember that Buffet recommended the S&P 500 index fund.
Good point. In my case we also had small cap funds to pair with S&P 500 and simulate the total US market.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by Bastiat » Wed Apr 25, 2018 11:18 pm

gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
Are you as adept at valuing stocks as "Buffet" [sic]? Are most people adept enough at picking stocks and timing markets relative to valuation to beat the S&P 500? Was not his bet with the hedge funds precisely to prove that they are not?

He is doing people a favor by encouraging them to buy the market independent of their own interpretations. He is encouraging bogleheadism...

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Re: Another Warren Buffett S&P 500 Recommendation

Post by nisiprius » Thu Apr 26, 2018 6:48 am

TheoLeo wrote:
Wed Apr 25, 2018 12:43 pm
...Thats a cool tool! Thanks for sharing. What I conclude from playing with it for a while is that bonds are useless and Buffett is right with his 90/10 :P
That's not how I see it.
In other words: The stock/bond allocation doesn´t meaningfully affect your SWR if you are going for a sensible failure probability.
That's exactly how I see it.

For a 'sensible" failure probability, and "sensible" allocations (not 100% stocks, not 100% bonds), the allocation doesn't meaningfully affect the backtested SWR.

How you act on that information involves a number of personal elements. The perennial debate is that, based on past history, the dispersion of returns from stocks has had about the same downside and a much higher upside than bonds. My favorite interpretation is that stocks have been like a kind of free lottery ticket that offer a really chance at a very decent, small jackpot. The problem is that you can't count on getting that jackpot. Therefore, regardless of what you actually choose to do, your retirement planning has to be about the same.

Nobody wants to hear this. While they are saving for retirement, what people want is a magic way to do it without having to set aside as much every month. In retirement, what people want is a magic way to spend more based on the amount of savings they have. For reasons I don't understand, it seems to me that the investment industry prefers to sell stocks rather than bonds. At any rate, many people get the impression that a high stock allocation will allow them to safely save less during accumulation, and safely spend more during retirement.

There are two other personal parts to the equation. One is "nobody should ever sell during a stock market crash, nobody ever needs to sell during a stock market crash, and I, being a rational person, will never sell during a stock market crash. Therefore behavior during stock market crashes is not anything that should be considered in planning." A wealth manager who's written numerous investing books (often with the word "smartest" in their titles) acknowledged that he, himself, "panic-sold" during 2008-2009 and said that he in fact had himself done what he was, at the same time, telling his clients not to do. As nearly as I can tell, the lesson he took from this is "I shouldn't have done that."

The second is that we assume that our personal "utility function," our personal happiness, our personal balance of feelings of comfort and security in old age, will be maximized by maximizing the expected average of our "terminal wealth dispersion." That is, it really isn't going to bother us much to see our retirement savings cut in half, and having to pay the same bills with half as much money, if our analysis shows that in backtested scenarios we wouldn't have actually run out. We predict that our anxiety at losing money we don't actually need will be more than outweighed by our comfort at knowing that the statistical odds are that we will die richer than if we'd invested more conservatively.
Last edited by nisiprius on Thu Apr 26, 2018 7:24 am, edited 3 times in total.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by longinvest » Thu Apr 26, 2018 7:12 am

I would never use SWR (constant-dollar withdrawal), a withdrawal method which lets most of its adopters die with an unspent fortune while bankrupting most of the others, as a retirement model to set my asset allocation!

Most retirees adapt their withdrawals to the reality of the moment.

Retirement withdrawals are better modeled using VPW (variable-percentage withdrawal), a withdrawal method which adapts withdrawals to market returns and allows the retiree to spend most of his portfolio while never prematurely depleting it. When using such a sensible withdrawal method as a retirement model, the impact of stock volatility on the withdrawal stream becomes obvious.

VPW is best used in conjunction with guaranteed base income from Social Security, pensions, and, if necessary, inflation-indexed Single Premium Immediate Annuity (SPIA). It has been suggested to delay the Social Security pension to age 70 to increase base income in forum topic: Delay Social Security to age 70 and Spend more money at 62.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by willthrill81 » Thu Apr 26, 2018 8:59 am

Lauretta wrote:
Wed Apr 25, 2018 7:16 am
gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
I agree. (Though to be fair he has in the past evoked interest rates and the idea that 'stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates' (as in the FED model viewtopic.php?t=245036 ))
Kitces demonstrated that over the long-term, valuations don't really matter. He examined 30 year periods following low valuations and high valuations in the U.S. and found that low starting valuations corresponded to about a 1% higher annual return over the period than average and 1% lower than average returns when valuations started high. That's hardly something to get worked up over.

Further, U.S. valuations have been above their long-term average almost constantly since 1992, yet real returns from then until now have been slightly above the historic average.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by Lauretta » Thu Apr 26, 2018 9:38 am

willthrill81 wrote:
Thu Apr 26, 2018 8:59 am
Lauretta wrote:
Wed Apr 25, 2018 7:16 am
gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
I agree. (Though to be fair he has in the past evoked interest rates and the idea that 'stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates' (as in the FED model viewtopic.php?t=245036 ))
Kitces demonstrated that over the long-term, valuations don't really matter. He examined 30 year periods following low valuations and high valuations in the U.S. and found that low starting valuations corresponded to about a 1% higher annual return over the period than average and 1% lower than average returns when valuations started high. That's hardly something to get worked up over.

Further, U.S. valuations have been above their long-term average almost constantly since 1992, yet real returns from then until now have been slightly above the historic average.
Interesting. I am not sure I understand your argument though, because of course even 1% a year makes quite a big difference over 30yrs (that's one of the reasons why usng low cost ETFs is so important). For example 1 million at 5% for 32 yrs (I do 32 yrs as it's quicker to calculate) grows to 4.75M$; whereas 1 million at 6% grows to 6.45M$. If I understand correctly your message, the difference between returns starting from low valuations and high valuations is 2%? (since both differ by 1%, in different directions, relative to the average). So 1M$ at 7% (i.e. 2% more than 5%) would make 8,7M$ in 32 yrs. Thus a 2% difference over 32 years results in having nearly twice as much at the end of the period.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by zwzhang » Thu Apr 26, 2018 10:13 am

Lauretta wrote:
Thu Apr 26, 2018 9:38 am
willthrill81 wrote:
Thu Apr 26, 2018 8:59 am
Lauretta wrote:
Wed Apr 25, 2018 7:16 am
gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
I agree. (Though to be fair he has in the past evoked interest rates and the idea that 'stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates' (as in the FED model viewtopic.php?t=245036 ))
Kitces demonstrated that over the long-term, valuations don't really matter. He examined 30 year periods following low valuations and high valuations in the U.S. and found that low starting valuations corresponded to about a 1% higher annual return over the period than average and 1% lower than average returns when valuations started high. That's hardly something to get worked up over.

Further, U.S. valuations have been above their long-term average almost constantly since 1992, yet real returns from then until now have been slightly above the historic average.
Interesting. I am not sure I understand your argument though, because of course even 1% a year makes quite a big difference over 30yrs (that's one of the reasons why usng low cost ETFs is so important). For example 1 million at 5% for 32 yrs (I do 32 yrs as it's quicker to calculate) grows to 4.75M$; whereas 1 million at 6% grows to 6.45M$. If I understand correctly your message, the difference between returns starting from low valuations and high valuations is 2%? (since both differ by 1%, in different directions, relative to the average). So 1M$ at 7% (i.e. 2% more than 5%) would make 8,7M$ in 32 yrs. Thus a 2% difference over 32 years results in having nearly twice as much at the end of the period.
Your number is correct. But if the initial 1M is not invested now at an exception of 5%, instead waited for another 5 years for the valuation becoming better so the expected return becomes 6%. Since the money will be invested only for 27 year, at the end of the whole 32 years, the number is only 4.55MS.

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Re: Another Warren Buffett S&P 500 Recommendation

Post by Lauretta » Thu Apr 26, 2018 10:17 am

zwzhang wrote:
Thu Apr 26, 2018 10:13 am
Lauretta wrote:
Thu Apr 26, 2018 9:38 am
willthrill81 wrote:
Thu Apr 26, 2018 8:59 am
Lauretta wrote:
Wed Apr 25, 2018 7:16 am
gmaynardkrebs wrote:
Tue Apr 24, 2018 11:10 pm
Let's be clear: Buffet's 10% - 15% annual return on equity is not the same as a 10%- to 15% annual return on your investment. (Wouldn't that be nice?) Buffet is avoiding the question of valuation, which is something he most certainly does not do with his own investments. But he's telling us to do so. Gee, thanks Warren....
I agree. (Though to be fair he has in the past evoked interest rates and the idea that 'stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates' (as in the FED model viewtopic.php?t=245036 ))
Kitces demonstrated that over the long-term, valuations don't really matter. He examined 30 year periods following low valuations and high valuations in the U.S. and found that low starting valuations corresponded to about a 1% higher annual return over the period than average and 1% lower than average returns when valuations started high. That's hardly something to get worked up over.

Further, U.S. valuations have been above their long-term average almost constantly since 1992, yet real returns from then until now have been slightly above the historic average.
Interesting. I am not sure I understand your argument though, because of course even 1% a year makes quite a big difference over 30yrs (that's one of the reasons why usng low cost ETFs is so important). For example 1 million at 5% for 32 yrs (I do 32 yrs as it's quicker to calculate) grows to 4.75M$; whereas 1 million at 6% grows to 6.45M$. If I understand correctly your message, the difference between returns starting from low valuations and high valuations is 2%? (since both differ by 1%, in different directions, relative to the average). So 1M$ at 7% (i.e. 2% more than 5%) would make 8,7M$ in 32 yrs. Thus a 2% difference over 32 years results in having nearly twice as much at the end of the period.
Your number is correct. But if the initial 1M is not invested now at an exception of 5%, instead waited for another 5 years for the valuation becoming better so the expected return become 6%. Since the money will be invested only for 27 year, at the end of the whole 32 years, the number is only 4.55MS.
good point, though one can invest it now at ~3% in bonds, or one can do as I did last year - invest it chiefly in Europe and EM, where lower valuations point to higher expected results.
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Re: Another Warren Buffett S&P 500 Recommendation

Post by JoMoney » Thu Apr 26, 2018 10:27 am

Lauretta wrote:
Thu Apr 26, 2018 10:17 am
...where lower valuations point to higher expected results.

I still find it interesting when people here seem to accept it as a given that lower valuations mean higher expected returns...
As opposed to the idea that the market is pricing the valuations relative to their expected risk/return
i.e. a lower valuation could mean lower expected growth priced at equilibrium with a higher returning asset with higher expected growth
"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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