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I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" a

I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. Buffet could lose 99% of his net worth, and still be one of the top 5,000 or so wealthiest people in history. He could then lose 99% of that wealth, and still be comfortably inside of the top 1% of wealth holders. He could invest that 1% of 1% of his money in a broad index, and comfortably live off the hundreds of thousands of dollars in annual returns. The mental model he has of the market is completely different to someone who is putting 1/5th of their $50k life-savings into investments. His appetite for risk and loss are entirely detached from most investors, and even many investment firms. Similarly, the range of opportunities open to Berkshire Hathaway is considerably different to the range of options available to a typical investor.

admissionsguy 3y ago
It’s not useful for opposite reasons. For Buffet, spending considerable effort to outperform the market by 10% is huge. For someone investing $10k, that’s $1k of upside.
- verbify 3y ago
  Conversely, if Buffett made 10% more one year, the impact on his life would be negligible. If someone has $10k, an extra $1k can make a huge difference.
  - WJW 3y ago
    That depends also on opportunity cost though. Buffett by his own admission just really enjoys the "game" (to him) of reading earnings reports and finding good companies to invest in. He sees no problem spending 40 hours per week of doing that, it's more like a hobby at this point. For people with $10k or less total invested, unless they also just really enjoy reading financial reports, spending their 40 hours per week on some sort of work or education is likely to have a much higher expected value than $1k.
WJW 3y ago
The "just put your money in an index" advice is good for the vast majority of investors precisely because they can't afford to lose all of it. Research has shown time and time again that returns for the average retail investor gets lower and lower the more active they are and the less diversified they are. It turns out that the average person is just not very good at picking stocks, especially when they have to compete in a market chock full of professionals with much deeper pockets and much better tooling. Investing it all in an index fund ties their returns to the returns of the wider market, which is a much better proposition than "you as an amateur get to go in the ring with the investment equivalent of Mike Tyson!".
- voisin 3y ago
  > It turns out that the average professional portfolio manager is just not very good at picking stocks FTFY. Time and time again we’ve seen evidence that portfolio manager success in a give year is largely random and does not persist. Very few (the superinvestors of Graham-and-Doddsville as a classic example) are capable of persistent alpha.
  - bombcar 3y ago
    If I remember correctly professionals could beat the market - before costs. Which is the problem; costs can’t be avoided.
  - samatman 3y ago
    It should be true of the average (median) investor as well. This is nearly tautological in fact.
    - voisin 3y ago
      The point isn’t that the average investor in a given year will perform at the market average (this is what I think you are referring to by the tautological claim). The point is that over time the correlation between winners (retail or professional) one time period to the next is essentially zero.
throw0101b 3y ago
> I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. The empirical evidence shows that the majority of active managers cannot beat the market, especially over longer time periods: * https://www.aei.org/carpe-diem/more-evidence-that-its-really-hard-to-beat-the-market-over-time-90-of-finance-professionals-cant-do-it-2/ https://www.aei.org/carpe-diem/more-evidence-that-its-really... Further, if you wish to try it yourself, consider: > For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about. > It’s just like this XKCD comic: https://xkcd.com/451/ https://xkcd.com/451/ > But, what about stock picking? How long would it take to determine if someone is a good stock picker? > An hour? A week? A year? > Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years. > And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even if you make money on absolute terms, you can still lose money on relative terms. * https://ofdollarsanddata.com/why-you-shouldnt-pick-individual-stocks/ https://ofdollarsanddata.com/why-you-shouldnt-pick-individua... > The mental model he has of the market is completely different to someone who is putting 1/5th of their $50k life-savings into investments. Except that Buffett has been doing the same thing for decades and has consistently done the same thing over that period of time. The reason why Buffett is rich is not because of his risk appetite, but because of his patience. The majority of his wealth is from compounding: > More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.16 What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. * https://www.goodreads.com/quotes/10551666-more-than-2-000-books-are-dedicated-to-how-warren-buffett https://www.goodreads.com/quotes/10551666-more-than-2-000-bo... The vast majority of Buffett's wealth was gain after he was in his 60s. And did you know that Buffett and Munger had a third partner? > Then Rick Guerin pretty much disappeared off the map. I've met Rick recently, but he disappeared off the map, so I asked Warren, are you in touch with Rick, and what happened to Rick? And Warren said, yes, he's very much in touch with him. And he said, Charlie and I always knew that you would become incredibly wealthy. And he said, we were not in a hurry to get wealthy; we knew it would happen. He said, Rick was just as smart as us, but he was in a hurry. And so actually what happened -- some of this is public -- was that in the '73, '74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls out the yin-yang, and he sold his Berkshire stock to Warren. Warren actually said, I bought Rick's Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at ... $40 apiece because he was levered. * https://www.fool.com/investing/general/2013/01/10/mohnish-pabrai-what-ive-learned-from-warren-and-ch.aspx https://www.fool.com/investing/general/2013/01/10/mohnish-pa... Most people don't want to get rich slowly.
mtlynch 3y ago
>Buffet could lose 99% of his net worth, and still be one of the top 5,000 or so wealthiest people in history. He could then lose 99% of that wealth, and still be comfortably inside of the top 1% of wealth holders. He could invest that 1% of 1% of his money in a broad index, and comfortably live off the hundreds of thousands of dollars in annual returns. This didn't seem true, but I think you're right. Warren Buffet is worth about $90B. If he loses 99% of that, he has $900M, which is probably still top 5,000 overall. And then if he lost 99% of that, he'd be down to $9M, which he could invest conservatively for a 4% return and live off $360k/yr.
- halfcat 3y ago
  > If he loses 99% of that He also made ~99% of his wealth after age 56.
- AndrewKemendo 3y ago
  Which is unconscionable That’s 90B of stolen value from employees who should be the owners of the stock
  - jddj 3y ago
    Let's rewrite that to work in some real world requirements. That's 90B of value which could have gone to employees had the capital needs of those growing businesses been met by debt (often requiring coincident equity injections or personal guarantees), by bootstrapping, or by those same employees. Perhaps now there's space for a conversation. What might a world need to look like for it to be made up of those businesses in place of one where ownership can be traded for capital at risk?
    - AndrewKemendo 3y ago
      Good idea My answer is anarchistic syndicalism: https://theanarchistlibrary.org/library/george-woodcock-what-is-anarcho-syndicalism https://theanarchistlibrary.org/library/george-woodcock-what... In short, labor has to organize our own capital to create syndicates that peacefully outcompete existing unethical structures Its going to take hundreds of years of organizing and reduction in the pervasive sense of social terror and fear which leads people to hoarding behavior 12000 years of this structure won’t end by force or overnight It can only be done through steady peaceful direct action to transfer wealth from existing hoarders to individuals We then disincentive personal consumption and vanity the same way we got here, through Bernays style propaganda (marketing) and building infrastructure that incentivizes community development over personal consumption
Animats 3y ago
> I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. Historically, Buffett bought undervalued companies, and sometimes ran them. Generally dull and boring companies with a long, profitable history and low P/E ratios. Or that's what he says in his book. But look at what Berkshire Hathaway owns today.[1] 45% of their portfolio is AAPL. Nothing else is above 10%. The railroads and Acme Brick are gone from the portfolio. [1] https://money.usnews.com/investing/stock-market-news/articles/the-complete-berkshire-hathaway-portfolio https://money.usnews.com/investing/stock-market-news/article...
- lamuswawir 3y ago
  Berkshire still owns many boring companies. They are mostly wholly owned and so are not listed under 'stocks'.
  - rpeden 3y ago
    Here's the full list of the companies it owns: https://www.berkshirehathaway.com/subs/sublinks.html https://www.berkshirehathaway.com/subs/sublinks.html
- dgfitz 3y ago
  > The railroads and Acme Brick are gone from the portfolio. They still list ACME bricks [0] unless you're thinking their website isn't accurate. I doubt it's inaccurate though. [0] https://www.berkshirehathaway.com/subs/sublinks.html https://www.berkshirehathaway.com/subs/sublinks.html
  - Animats 3y ago
    Ah, I missed their outright ownership list. They did sell Union Pacific and BNSF, though.
- bombcar 3y ago
  It bought under or normally valued companies and provided incredibly cheap cost of capital.

admissionsguy 3y ago

It’s not useful for opposite reasons. For Buffet, spending considerable effort to outperform the market by 10% is huge. For someone investing $10k, that’s $1k of upside.

verbify 3y ago
Conversely, if Buffett made 10% more one year, the impact on his life would be negligible. If someone has $10k, an extra $1k can make a huge difference.
- WJW 3y ago
  That depends also on opportunity cost though. Buffett by his own admission just really enjoys the "game" (to him) of reading earnings reports and finding good companies to invest in. He sees no problem spending 40 hours per week of doing that, it's more like a hobby at this point. For people with $10k or less total invested, unless they also just really enjoy reading financial reports, spending their 40 hours per week on some sort of work or education is likely to have a much higher expected value than $1k.

WJW 3y ago

The "just put your money in an index" advice is good for the vast majority of investors precisely because they can't afford to lose all of it. Research has shown time and time again that returns for the average retail investor gets lower and lower the more active they are and the less diversified they are. It turns out that the average person is just not very good at picking stocks, especially when they have to compete in a market chock full of professionals with much deeper pockets and much better tooling. Investing it all in an index fund ties their returns to the returns of the wider market, which is a much better proposition than "you as an amateur get to go in the ring with the investment equivalent of Mike Tyson!".

voisin 3y ago
> It turns out that the average professional portfolio manager is just not very good at picking stocks FTFY. Time and time again we’ve seen evidence that portfolio manager success in a give year is largely random and does not persist. Very few (the superinvestors of Graham-and-Doddsville as a classic example) are capable of persistent alpha.
- bombcar 3y ago
  If I remember correctly professionals could beat the market - before costs. Which is the problem; costs can’t be avoided.
- samatman 3y ago
  It should be true of the average (median) investor as well. This is nearly tautological in fact.
  - voisin 3y ago
    The point isn’t that the average investor in a given year will perform at the market average (this is what I think you are referring to by the tautological claim). The point is that over time the correlation between winners (retail or professional) one time period to the next is essentially zero.

throw0101b 3y ago

> I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. The empirical evidence shows that the majority of active managers cannot beat the market, especially over longer time periods: * https://www.aei.org/carpe-diem/more-evidence-that-its-really-hard-to-beat-the-market-over-time-90-of-finance-professionals-cant-do-it-2/ https://www.aei.org/carpe-diem/more-evidence-that-its-really... Further, if you wish to try it yourself, consider: > For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about. > It’s just like this XKCD comic: https://xkcd.com/451/ https://xkcd.com/451/ > But, what about stock picking? How long would it take to determine if someone is a good stock picker? > An hour? A week? A year? > Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years. > And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even if you make money on absolute terms, you can still lose money on relative terms. * https://ofdollarsanddata.com/why-you-shouldnt-pick-individual-stocks/ https://ofdollarsanddata.com/why-you-shouldnt-pick-individua... > The mental model he has of the market is completely different to someone who is putting 1/5th of their $50k life-savings into investments. Except that Buffett has been doing the same thing for decades and has consistently done the same thing over that period of time. The reason why Buffett is rich is not because of his risk appetite, but because of his patience. The majority of his wealth is from compounding: > More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.16 What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. * https://www.goodreads.com/quotes/10551666-more-than-2-000-books-are-dedicated-to-how-warren-buffett https://www.goodreads.com/quotes/10551666-more-than-2-000-bo... The vast majority of Buffett's wealth was gain after he was in his 60s. And did you know that Buffett and Munger had a third partner? > Then Rick Guerin pretty much disappeared off the map. I've met Rick recently, but he disappeared off the map, so I asked Warren, are you in touch with Rick, and what happened to Rick? And Warren said, yes, he's very much in touch with him. And he said, Charlie and I always knew that you would become incredibly wealthy. And he said, we were not in a hurry to get wealthy; we knew it would happen. He said, Rick was just as smart as us, but he was in a hurry. And so actually what happened -- some of this is public -- was that in the '73, '74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls out the yin-yang, and he sold his Berkshire stock to Warren. Warren actually said, I bought Rick's Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at ... $40 apiece because he was levered. * https://www.fool.com/investing/general/2013/01/10/mohnish-pabrai-what-ive-learned-from-warren-and-ch.aspx https://www.fool.com/investing/general/2013/01/10/mohnish-pa... Most people don't want to get rich slowly.

mtlynch 3y ago

>Buffet could lose 99% of his net worth, and still be one of the top 5,000 or so wealthiest people in history. He could then lose 99% of that wealth, and still be comfortably inside of the top 1% of wealth holders. He could invest that 1% of 1% of his money in a broad index, and comfortably live off the hundreds of thousands of dollars in annual returns. This didn't seem true, but I think you're right. Warren Buffet is worth about $90B. If he loses 99% of that, he has $900M, which is probably still top 5,000 overall. And then if he lost 99% of that, he'd be down to $9M, which he could invest conservatively for a 4% return and live off $360k/yr.

halfcat 3y ago
> If he loses 99% of that He also made ~99% of his wealth after age 56.
AndrewKemendo 3y ago
Which is unconscionable That’s 90B of stolen value from employees who should be the owners of the stock
- jddj 3y ago
  Let's rewrite that to work in some real world requirements. That's 90B of value which could have gone to employees had the capital needs of those growing businesses been met by debt (often requiring coincident equity injections or personal guarantees), by bootstrapping, or by those same employees. Perhaps now there's space for a conversation. What might a world need to look like for it to be made up of those businesses in place of one where ownership can be traded for capital at risk?
  - AndrewKemendo 3y ago
    Good idea My answer is anarchistic syndicalism: https://theanarchistlibrary.org/library/george-woodcock-what-is-anarcho-syndicalism https://theanarchistlibrary.org/library/george-woodcock-what... In short, labor has to organize our own capital to create syndicates that peacefully outcompete existing unethical structures Its going to take hundreds of years of organizing and reduction in the pervasive sense of social terror and fear which leads people to hoarding behavior 12000 years of this structure won’t end by force or overnight It can only be done through steady peaceful direct action to transfer wealth from existing hoarders to individuals We then disincentive personal consumption and vanity the same way we got here, through Bernays style propaganda (marketing) and building infrastructure that incentivizes community development over personal consumption

Animats 3y ago

> I think it's imprudent for the average retail investor to take on and action Buffets advice in most contexts, except for his "just put your money in an index" advice. Historically, Buffett bought undervalued companies, and sometimes ran them. Generally dull and boring companies with a long, profitable history and low P/E ratios. Or that's what he says in his book. But look at what Berkshire Hathaway owns today.[1] 45% of their portfolio is AAPL. Nothing else is above 10%. The railroads and Acme Brick are gone from the portfolio. [1] https://money.usnews.com/investing/stock-market-news/articles/the-complete-berkshire-hathaway-portfolio https://money.usnews.com/investing/stock-market-news/article...

lamuswawir 3y ago
Berkshire still owns many boring companies. They are mostly wholly owned and so are not listed under 'stocks'.
- rpeden 3y ago
  Here's the full list of the companies it owns: https://www.berkshirehathaway.com/subs/sublinks.html https://www.berkshirehathaway.com/subs/sublinks.html
dgfitz 3y ago
> The railroads and Acme Brick are gone from the portfolio. They still list ACME bricks [0] unless you're thinking their website isn't accurate. I doubt it's inaccurate though. [0] https://www.berkshirehathaway.com/subs/sublinks.html https://www.berkshirehathaway.com/subs/sublinks.html
- Animats 3y ago
  Ah, I missed their outright ownership list. They did sell Union Pacific and BNSF, though.
bombcar 3y ago
It bought under or normally valued companies and provided incredibly cheap cost of capital.