Picking Investments: Only Two Things Matter
blog.futureadvisor.com
blog.futureadvisor.com
We should have been more clear - this particular post is all about security selection for the individual investor, i.e. "I have this much money to put into my IRA and what should I buy" type questions.
The returns were only crappy for those who invested a lump sum at the peak in 2000 and never reinvested dividends.
Tax efficiency matters. A badly designed portfolio may lose 1% a year to taxes. Tax-inefficient investments should be held in tax-advantaged accounts (e.g. tax-free or tax-deferred accounts).
And it matters that you have the discipline to stick to your plan through all market conditions.
For example, I'm looking at a chart of his "Permanent Portfolio" from 1970 through 1987, which weights four asset classes equally at 25% each: gold, stocks, bonds, and cash. The portfolio has far lower volatility and far lower draw-downs than gold, stocks, or bonds alone. The portfolio also outperforms stocks or bonds alone. It does not outperform gold over this 17 year period, but by 1987 it comes close. It probably overtakes gold alone in subsequent years, since gold vastly underperformed the stock market from 1987 to 2001.
One good aspect of asset allocation is that it keeps on the opposite side of manic up or down trends. This strategy would have you selling gold at $800 in 1980, and buying gold at $250 in 2001. Gold has vastly outperformed the stock market since then.
Similarly, this strategy would have you buying stocks in 1974, when many people thought equities were "dead" and only fools were in the stock market.
You might think these references are a little dated, but again the principle is timeless. Anyone who says "it's different this time" is probably wrong.
"Real estate isn't an essential investment for a Permanent Portfolio. Real estate offers no profit or protection to a portfolio that can't be achieved more easily with stocks and gold."
He then accepts the reality that many readers have invested or wish to invest in real estate, and goes on to talk about it at length.
Clearly real estate can produce high income and gains for those who have the capital to buy property and the time and money to manage it, but I do see his point.
http://news.ycombinator.com/item?id=1949158
tl;dr Before IPO Google made several seminars so it's employees can get investment advice on how to invest their future millions. The advice was to invest in index funds.
Though Warren Buffett has indeed recommended index funds to individual investors, he has repeatedly argued that the fundamental premise of index investing (that is, EMH, the efficient market hypothesis) is fatally flawed and that index investing is basically a stupid thing to do: "Naturally, the disservice done to students and gullible investment professionals who have swallowed EMT [efficient market theory] has been an extraordinary service to us and other followers of Graham. In any sort of a contest -- financial, mental, or physical -- it's an enormous advantage to have opponents who have been taught that it's useless to even try. From a selfish point of view, Grahamites should probably endow chairs to ensure the perpetual teaching of EMT." Buffett basically says that if you don't have time to dig into stocks, then index funds are the way to go - though they're still a terrible way to go. I disagree. When you look at the academic literature as well as Buffett's own philosophy (which draws heavily on the work of Benjamin Graham and David Dodd), investing based on value works over time and handily beats the broad indices. That is, if an investor buys what is undervalued, they will outperform the market. Now, to truly understand if a security is undervalued requires an enormous amount of knowledge and analysis, but it's been shown that even rough proxies for undervaluation (i.e. simplistic statistical screens such as price/earnings or price/book) work, and work well.
Joel Greenblatt, another very successful and highly respected investor (who subscribes to the same investment philosophy known as "Value Investing" that Buffett follows and Graham birthed), also disagreed with Buffett and he proposed a system that does in fact recommend buying undervalued securities as determined by statistical screens. Here's his site below: http://www.magicformulainvesting.com/welcome.html
If you buy the index when the market is overvalued, you'll end up doing very, very poorly. This is not about market timing; this is about valuation. You could use a simple P/E or a Schiller P/E (http://www.multpl.com/) to understand where the market stands on a valuation basis. This is the sort of analysis that Jeremy Grantham, another very successful value investor, does when he determines asset allocation and security selection (http://www.gmo.com/America/). If a certain asset class is overvalued, then why would you put the same amount of money into it? You want to put more money into the asset classes that are undervalued. Asset allocation should not be a static allocation; it should vary based one very important factor - value.
For the "enterprising investor", s/he can afford to spend more time to find undervalued stocks and possibly outperform the market. For the "passive investor", to paraphrase Graham, it is good enough to simply invest in a representative set of securities, such as an index.
In fact, if I remember my Intelligent Investor correctly, there are various passages where Graham actually admits to the EMH being somewhat inevitable. Note that there are different variants/degrees of the EMH, and Graham probably subscribes to the weak or semi-strong versions.
Nonetheless, the point is that a belief in the EMH is not mutually exclusive with value investing. It depends a little on the extent to which you believe the market is efficient, and a lot on how much work you're willing to put into it.
My basic point is that every investor, passive or active, must protect him or herself against the risk of overpaying. Passive index investing does not protect you from this risk, and is therefore very dangerous.
Fully agreed that good investing is pretty much totally dependent on how much work and emotional discipline you're willing to put into it.
That said, I wouldn't touch BRK. Size is the anchor now and there are very limited opportunities for BRK to grow at the same pace they've grown over the last 25 years.
That said, you may be right about the size problem.
They'd be more useful if placed into a full sentence, for instance "I think you should put all your net wealth into shares of Berkshire Hathaway" or "I think you should try to replicate Berkshire Hathwaway's investment strategy" or "Hey, you should think about buying a little bit of Berkshire Hathaway as part of a diversified portfolio which also includes other asset classes".