The typical investor has no business investing in individual stocks. Most of my investments are in Vanguard index funds–VTSAX is my favorite. Until recently, I owned only two individual stocks. I also own some managed funds (which carry higher fees) but I would move all of my investments to VTSAX if I could do it without paying taxes on my gains. You can learn more about my investment philosophy here.
A few months ago I broke one of my cardinal rules. I bought another individual stock–BRK–Berkshire Hathaway. I bought it only because I wanted to go to the annual meeting and see Warren Buffett (world’s 2nd richest person) and his partner, Charlie Munger talk about investing and life. A trip to Omaha doesn’t sound all that exciting but this annual meeting is a real spectacle–more about that later.
I was amazed at how humble these guys are. They are arguably the greatest investors of all times and yet they readily admit their failures, give credit to their managers for their success and laugh about their good luck.
These two old guys (86 and 93) sit at a table and take questions for five hours. Selected members of the press, financial analysts and shareholders can ask them anything. The thing that struck me most about this conversation was something Charlie said:
You don’t have to be a brilliant investor to make money, you just have to be a rational investor.
This is appealing to me because few of us have the ability to be brilliant investors, but most of us can be rational. A rational investor doesn’t sell in downturns, but buys because stocks are on sale. A rational investor doesn’t take risks that outweigh the benefits.
They had an amusing conversation about what they would tell their widows to invest in once they are gone. Warren recommends 10% cash and 90% Vanguard S&P 500 index funds, Charlie recommends Berkshire Hathaway stock (it’s the family business). Warren’s reasoning against BRK is only that fewer people could tell his widow she is crazy to have the bulk of her money in a single stock. It would make her less susceptible to the unscrupulous.
I agree with Warren. We would all be well served by investing in a broad U.S. index fund. We wouldn’t need financial advisors, the worst of which are more concerned about their compensation than they ever will be about your money. I would be much better off if I had done just this earlier–or if I had bought BRK . . .
They are bullish on the U.S. stock market. Warren said, given that we’ve not let over half of our population contribute to gross domestic product historically–women and arguably many minorities, there is no reason to believe that our future won’t be as great as our past.
Warren also said you need to do things that make you happy. Drinking five Cokes a day makes him happy. He tells students to find the job you would do if you didn’t need to work.
So we just need to be rational investors and do what makes us happy. I can do this–can you?
Random musings about the spectacle that is the BRK annual meeting:
The session starts with a movie that includes some of BRK’s subsidiaries’ best commercials and some entertaining videos of Warren and Charlie. One video was of Warren stopping for his McDonald’s Breakfast–he opted for the least expensive option that day because the market was down. He has a net worth of $67 billion and chose a $2 breakfast.
I was surprised that about 20% of attendees were Asian and about 50% of attendees were not speaking English. Warren’s greatest impact is exporting capitalism to the world.
We were in line at 5 a.m. to get a good seat–the doors opened at 7 a.m. We chatted with the attendees around us–one of whom started an investment company in India using Warren’s value investing, hold forever philosophy.
It was worse than a rock concert with people pushing through the doors and running to the arena. Security is stationed in the halls to say no running.
Each shareholder could have four credentials. Many shareholders brought their children–what an incredible lesson to those kids!
Jack Bogle (the founder of Vanguard) was at the meeting. Warren credits John with saving investors billions and billions of dollars in mutual fund fees. He had to go against common practice and the entire community of investment advisors to launch these funds.
They had a whole bunch to say about mutual fund fees (particularly hedge funds which charge 2% of the balance + 20% of any gains each year) and the inability of these funds to consistently beat index funds. Managed mutual funds charge more for less–they can’t overcome the headwinds created by the larger fees. You can read more about Warren’s opinions on these fees in their annual letter to shareholders starting on page 21.
The biggest headwind US companies face is not our corporate tax rate, it is the cost of healthcare. Charlie commented that we need to stop administering chemotherapy to virtual corpses–tough decisions that our legislators will not ever agree upon.
Warren considers himself to be incredibly lucky. To be born in the U.S. and to be born male means he won the ovarian lottery. I would add to be born Caucasian to that list. He was lucky to get rejected by Harvard and, accepted by Columbia for his MBA. It was at Columbia that he learned from the greatest value investors of that era–Graham & Dodd.
Warren and Charlie needed sustenance to make it through the five hour Q&A session so they drank multiple Cokes and ate See’s peanut brittle and Kraft cheesecake. Warren drinks five Cokes a day and makes no apologies for it–he thinks it is important to enjoy life and he enjoys Coke.
We wondered about the total net worth of the attendees. Warren (2nd richest man in the world), Charlie, Bill Gates (richest man in the world), and Jack Bogle were all in the arena.
The annual meeting is really a shopping extravaganza in disguise. The exhibit hall is filled with BRK company exhibits–Dairy Queen, Pampered Chef, a jewelry, book and furniture store, Net Jets, Fruit of the Loom, Coke, Kraft, Bose, Geico etc. People stand in lines to purchase company products (with a small shareholder discount). There are approximately 40,000 attendees and they set records for their purchases each year. Mr. Ms. Liz and I didn’t contribute much to this record but we will be sporting some BRK memorabilia.
I went to the meeting knowing a bit about Warren and nothing about Charlie. I came home loving Charlie. He’s unfiltered and direct–sounds familiar to those who know me. Read some of his quotes and you’ll love him too. Here’s my favorite: “Live within your income and save so that you can invest. Learn what you need to learn”.