Tag Archives: Investing

ETF's as a hedging tool?

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A while a go I wrote a post that discussed the difference between ETF’s and and Index Funds for diversification purposes … and, you know what I think about diversification.

But, for those who are just passing by the blog and thought you’d like to drop in [AJC: my regular readers will skip over this post because they wouldn’t be interested in diversification either 😉 ] here is an interesting article from the Tycoon Report:

If you haven’t already, you should start moving your money out of mutual funds and into ETFs (Exchange Traded Funds).  In my opinion, they are tailor made for the “Average Joe” investor to get the benefits of a mutual fund without their crazy fees.

For a detailed listing of all of the fees, etc. that come with mutual funds, you can visit http://www.sec.gov/investor/pubs/inwsmf.htm#how.

In my opinion, the only downside (for some people) with respect to ETFs may be that you can buy and sell them as easily as you can.  The reason that I say that this may be a downside for some people is because, if you are impatient or have an addictive personality,etc., then you may know yourself well enough to stay away from investments that you can easily get in and out of.

In other words, if your personality is such that you are tempted to trade without a logical reason to do so, then perhaps the difficulties (such as fees) that come with a mutual fund will prevent you from trading needlessly.  An ETF, on the other hand, may (because of their ease) encourage certain types of people to trade.  If you do not have this type of issue, then you should certainly choose ETFs over mutual funds.

I like ETFs personally because they are less risky than individual stocks.  As you may know, you can never totally eliminate risk, but you can reduce it.  You can reduce risk by hedging, diversification, and insurance.  ETFs reduce risk through diversification, as you’re not assuming the risk that your investment will go to zero based on the demise of one single company.

Nice summary. Here’s where I sit … if you’re using the ETF for:

1. Speculation– Using an ETF (or any other ‘broad-based’ investment) as a hedge against short-term risk is fraught with danger … you are speculating. Yes, you are ‘hedging’ against the risk of any particular stock tanking (conversely, spiking) but you are really just betting with/against the whole market – if people knew where the market was going, they would be richer than Buffett. On the rare occasions that I do speculate (anything less than a 5 – 10 year outlook going in is speculating to me), I prefer to speculate with options and/or just a select handfull of the underlying stocks.

2. Investment– Now, if I am going to invest with a 5 – 10+ year outlook going in, then I am less likely to be speculating and more likely to be ‘saving’ or ‘investing’. It’s important to realize that I may not actually hold the investment for that long ( who knows what the future will bring?), but I certainly have the expectation of holding, going in. I don’t like to ‘invest’ in a broad-based ETF/Index because then I am truly ‘investing’ in paper, and market sentiment/emotions. I would not be investing with the understanding of the fundamentals of the underlying business, which is the only way that I expect to ‘beat the market’ in the long-term: buy under-valued businesses that I would be prepared to hold forever, and wait for the market to ‘catch up’ to my way of thinking … this is pretty much what Buffett does (actually, did … when he was a little smaller and could make smaller investments) with the stock investment part of his portfolio. If I get it wrong, but I llike the business and it makes good profits (else, I wouldn’t have bought it … then, I don’t mind holding. If I get it right, and the price spikes up to ‘fair market value’, I may end up selling early.

3. Saving– I don’t have ‘saving’ strategies – my speculation (20%) and investment (80%) strategies seem to cover me pretty well. But, if you just want to plonk your money away … either as a one-off (Uncle Harry left you some money) or on a more regular basis (you have a 401k or just want to regularly save) … AND you have a 20+ year outlook, then this is where ETF’s or Index Funds finally come into play! Plonking your money into a Spider ETF or broad-based Index Fund can be better options than CD’s or Bonds. Just don’t get fancy here … the good news is that Warren Buffett also recommends this strategy for the “know nothing investor” as he calls them … he also calls it “dumb money“, but he means that in a nice way 🙂

Now, as to selecting an ETF v a broad-based Index Fund, it’s a close call.

Finally, I was a little amused this little ‘teaser’ on the very same page as this very nice Tycoon Report article exhorting you to ‘invest’ in ETF’s; it said:

Most ETF Traders Will Lose … And Lose BIG

ETFs are the hottest new investment around, and for good reason. But many everyday investors who jump into ETFs without a proven system to guide them will lose their shirts.

Then [of course] it went on to the ‘solution’: On Thursday, June 12th, Teeka Tiwari will reveal the secrets of using ETFs to generate enormous wealth. But, there’s nothing wrong with a little good marketing …

My advice? Keep your shirt buttoned!

Millionaire by 30?

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The best way to become a Millionaire by 30 is to watch my Live Show this Thursday @ 8pm CST (9pm EST / 6pm PST) at http://ajcfeed.com ….

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Recently I wrote a post that I consider to be one of the critical “you either get it or you don’t” pieces that will determine whether you will ‘make it’ or not …. if you haven’t seen it yet, fully understood it, or hotly debated it (with me, yourself, or your mother) then I highly recommend that you go and get to it!

Anyhow, Jim wrote a comment:

This video was suggested from one of my posts and I think it gives a pretty good example of your premise. This is Douglas Andrew, author of Missed Fortune…

I watched the video … and, set it aside presuming that because it was so short, the one or two glaring errors (did you spot them?) would have been addressed in the full video (or a Douglas Andrews seminar) …

… then I saw an article on My Money Blog:

The overall moral of this book review is that even though a book finds a publisher, it doesn’t mean the advice is accurate or applicable to you. The book Millionaire by Thirty: The Quickest Path to Early Financial Independence by Doug Andrews & Company appears to be very similar to the other Missed Fortune books by the same author. In fact, from reading the reviews all of these books seem to contain the exact same material.

Housing Prices Always Go Up, Take Out Largest Mortgage Possible!

“Do you rent? Rent is like throwing money down a black hole. It doesn’t matter how much money you have saved or how long you plan on staying in the same place, you should always try to buy a home. If you aren’t going to stay very long you can simply get an adjustable-rate loan with no down payment. Housing prices always go up, so you can enjoy the low interest for a couple of years, and then sell and make a nice profit.

If you are really smart and disciplined, you can even get an interest-only or negative-amortization loan because then you won’t build up any equity at all. Accumulating home equity is bad. Anytime you have any, you should take out a loan on it and invest it somewhere else, like a second home.”

The above are all the dangerous generalizations about real estate contained in this book. Newsflash… Renting can be the best option for many people. Housing prices do not always go up. Thousands of people who bought a home and now have to sell after a few years will have lost tens of thousands of dollars compared to if they had rented.

Summary
Many of the books I read may not be brilliant, but they contain generally good ideas and target a specific type of reader. However, this book is one that could actually hurt more people than it helps. This book is just plain misleading. It would be wonderful if home prices always went up and there was an investment where I could never pay taxes, have no downside risk, and get stock-like returns, but unfortunately both are too good to be true. I’ve tried to lay out my arguments for this briefly, but if you want a better description read the detailed reviews here and here. Clever Dude also shared his thoughts here.

Short version: Don’t read it, don’t buy it, don’t even borrow it from the library

Firstly, I agree with My Money Blog on the home ownership issue to a degree … owning your own home is not always the smartest FINANCIAL option. 

However, here is where I differ: for MOST people, it’s the only way that they will get financially free for lots of psychological/emotional reasons, more than strictly financial. Also, I do agree with the ‘forced saving’ and ‘forced appreciation’ that it can give you (provided that you do something with the appreciation … you don’t want to die ‘house rich / cash poor’!).

The ONLY time you shouldn’t invest in your own home, is to invest in income-producing property instead*.

And, while it’s true that real-estate doesn’t always go up, if you have a 20 – 30 year outlook and can lock in circa 6% interest for up to 30 years (another reason why your own home can be a good idea) … I think the future is exceedingly bright.

So, it is with a little surprise that I find myself actually siding with Doug – warts and all (!) – on this one …

But, I don’t agree with Doug that you shouldn’t have ANY equity in your own home (again, strictly financially speaking, he is probably correct), but I have proposed the 20% Rule that says that you should have no more than 20% of your Net Worth invested in your own home at any one time.

This rule, when understood and applied properly, accomplishes two key things:

1. Let’s you get/stay invested in your own home, but

2. Ensures that you maintain enough of your Net Worth in outside investments.

… without the screaming holes in the get-rich-quick schemes promoted by the ‘nothing down’ brigade!

So, go back and read all the posts that I have linked to … as I said at the very beginning, this could be the key to your wealth …

* or to invest in some other high-reward activity (e.g. buying/starting a business; leveraged
  investments; etc.) ... although, I would still prefer that you ALSO buy you own home 'just in case'

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Hitting Suze Orman out of the ball park …

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… with a fly ball that even Dave Ramsey won’t be able to catch!

As expected, my recent post “Contrary to popular opinion, paying off your mortgage is the dumbest move you can make …” drew a number of comments – but, not as many deep criticisms as I was expecting (hoping for) … I would’ve liked some issues out in the open so that we can really bang them around.

After all, my view is diametrically opposite to the ‘pay off ALL debt INCLUDING your mortgage’ view espoused by the likes of Suze Orman and Dave Ramsey!

With some suitable flaming of the “you’re just another Make Millions In Real Estate Like I [wished] I Did guru” or “Robert Kiyosaki knows what he’s talking about compared to YOU” kind, I’d at least be able to dig in and show you why my view is correct for MOST people.

I’d also be able to explain why, perhaps counter-intuitively, it’s actually the more conservative option.

Instead, let me make do with the much more polite, and more thoughtful, comments that one reader – Chris – did leave on that post:

AJC – I completely understand and agree with your concept. I think the reason why you and Suze Orman differ is because you target a different group, or have a different approach.

You talk much more about leverage. Suze Orman wants to get people to stop buying frivolous things and instead pay down debt (because most people are buying junk and creating more of it).

While anybody can start a business, a rental, etc. There are people who don’t have the ambition or the stomach for it. The concept of leverage and more involved ways of wealth appreciation get lost on those people.

The point that needs to be made is, if you aren’t going to leverage that debt properly to grow wealth, then paying it off is better than buying useless things. Perhaps for some people we need to focus on getting them to be frugal spenders first, and then wealth builders later.

I would also note that I think paying off mortgage debt should rank much lower than other investments in reducing higher cost debt, a business (including rentals) or retirement accounts. But for some people, putting an extra $100 towards a mortgage is a great way for them to start being more financial considerate.

The assumption is that my approach is different to Suze’s and Dave’s because:

1. I aim at a different audience

2. Their approach is a more sure way to a comfortable retirement

3. They focus on ‘frugal living / debt free’ which comes before wealth building

It seems logical, safe, and conventional … and, I agree on one point, my approach isn’t for everybody …

… it’s just for anybody who doesn’t want to retire on the poverty line!

By that, I mean that I am targeting anybody who wants to retire with a nest-egg of MORE than $1 Million in LESS than 20 years.

Now, that is almost everybody that I have ever known or met– and, I’ve known and worked with a LOT of people from call-center people to CEO’s – because $1 Mill. in 20 years (the typical target for the ‘save your way to wealth’ crowd) simply gives you the equivalent of $15k per year in today’s spending-dollars!

For every extra million dollars, you only get an additional $15k per year to live off … and, for every 10 years that you will retire sooner, you get another $7,500 per year ‘pay rise’.

So: how much do you need to live off now? How much do you need to live off when you ‘retire’ and by when?

I don’t know the answers to these questions, so you do the math …

I can tell you this: if all you do is live frugally and become debt free you will be poor, with a roof over your head … if you don’t, you will be poor without a roof over your head.

Neither seems like a great option … so, you can understand when I say that the Suze Orman / Dave Ramsey ‘save and pay off all debt’ approach still seems a tad ‘risky’ to me, and a sure approach to a fairly uncomfortable retirement.

Given that Door 1 and Door 2 pretty much suck [AJC: OK so one door sucks more than the other … are we here to measure degrees of ‘suckiness” or what?!] what’s left is Door 3 …

If you live on the same planet that I come from (Planet Save a Little, Spend a Little … Enjoy a Lot), then we simply have to aim for more … a lot more!

That’s where leverage comes in … and, it has to come in WHEN saving, WHEN learning to be frugal, WHEN paying off all debt (and, probably BEFORE paying off some debt) …

… and, if you are aiming to retire somewhere above the poverty-line, then you are simply going to have to find the ‘ambition or the stomach’ for something.

I never had the ambition or stomach for work … I simply had to do it or starve. Don’t you?

I never had the ambition or stomach for investing … I simply had to do it or figure on retiring near-broke. Won’t you?

If the government takes away your social security safety net … if your employer takes away your pension … if your rich relatives die and forget to leave you anything … it’s going to be that simple: do it or retire broke.

OK, if that hasn’t turned you on, then nothing I ever write will … otherwise, here are some options, in decreasing order of risk and difficulty – but, also decreasing order of financial outcome:

1. Start a business

2. Buy a business

3. Invest in real-estate

4. Buy your own home

5. Leverage into Stocks

6. Leverage into Index Funds

In every one of these cases, you borrow as much as the banks, convention, your gut, your advisers tell you to … then you hold – preferably for ever.

[AJC: Speculative ‘investment’s such as: rehabbing/flipping real-estate; trading stocks/options etc. all belong in Category 1. Start a business]

Now, go do it …

What are the pro's and con's of value investing?

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I answered a great question at TickerHound posted by the staff (as they do from time to time to stimulate discussion) that I thought I should simply repeat here:

What are the pro’s and con’s of value investing? Do you think it’s a worthwhile strategy or are you more of a “efficient market” proponent?

Well, I consider myself a Value Investor in everything that I do … stocks, real-estate, etc. The only exception is in the case of businesses, I’m generally a Growth Investor or a Value Investor.

Value Investing simply means “buying something worth $2 for $1” … well, not exactly, but you get my point: buying something for less than it is WORTH.

Now, this is a critical distinction: just because something was selling for $2 last week, and is selling for $1 this week, doesn’t mean that it is a VALUE Stock … it may only be ‘worth’ $0.50 and the market may simply be driving the price down to that … and, beyond!

In fact, that same stock (really ‘worth’ only $0.50) may BECOME a Value Stock if/when the market overshoots and sends the price down to $0.25.

The problem with Value Stocks is then one of KNOWING what they are truly worth at any point in time, and only buying when they are selling for a price less than that (preferably, with a large Margin of Safety … which simply means, buying it for MUCH LESS than what you THINK it is worth “just in case” …).

Now that we have covered the basics, what is the PRO of Value Investing?

Exactly that … being able to buy something ‘worth’ $2 for only $1. I can’t think of a better, more sure way of making money than that!

Then, what is the CON of value Investing … after all, there must be some or we’d ALL be doing it?

Simple: as I said before, it’s all about KNOWING which stock that is currently selling for $1 is actually worth $2 (and, avoiding the ones that are only worth $0.50!!). And, that takes some knowledge and skill. Warren Buffett has that knowledge and skill … so do many others, to a greater or lesser extent.

One other CON – one that is, ironically enough, addressed by another TickerHound question: “Is technical analysis still applicable in a “news driven” market like the one we’re in now?”:

If a stock that you KNOW is worth $2 is currently selling for $1, is it an automatic BUY?

Well NO … you see, you KNOW it is worth $2, but the rest of the market may not!

Or, it may have BEEN worth $2 but there is something happening (maybe a pending lawsuit around a key patent, or the loss of a major contract, or … ) that YOU don’t know about because it hasn’t hit the “news” (or TickerHound) yet, but those ‘in the know’ are selling off the stock by the truckload.

So, that’s where technical analysis is not just applicable in a “news driven” market like the one we’re in now, but absolutely CRITICAL for buying Value Stocks …

… it will tell you WHEN to buy (or sell off) that stock holding, based upon what the “insiders” are doing.

If you want to learn more about Value Investing, and using Technical Analysis to know when to get in/out of a Value position, I recommend picking up a copy of Phil Town’s excellent primer: Rule 1 Investing …

… and, Good Luck!

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Ali Baba and the … rabbit?

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7 Millionaires ... In Training!

Last 24 hours to apply!!!!

Recently, I sent out a Casting Call for what I call my Grand Experiment … a real attempt to create 7 Millionaires in just 7 Years! If you haven’t applied yet, you still have time … 24 hours to be precise (applications close Midnight CST, June 2, 2008).

Now might be a great time to sign up for regular e-mail updates – that way, when something does happen, well you’ll be amongst the first to know! You can sign up by clicking here:

Subscribe to 7 Millionaires … In Training! by Email

Read on for today’s post ….

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OK, I admit it … I learned as much from Bugs Bunny as anybody … even about money!

Don’t believe me, watch this latest installment from my Videos-on-Sundays series and tell me the ‘money moral’ (!):

http://youtube.com/watch?v=1oOEjssp2pE

AJC.

 

Is Money's only 7 Investments that you need wrong?

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ANNOUNCEMENT: To kick off the final stages of the 7 Millionaires … In Training! project selection process, AJC is going LIVE – this Thursday @ 8pm CST !!!

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Last month Money Magazine published an article listing the only 7 investments you need – and Kevin at No Debt Plan wrote a follow-up piece that summarized the options nicely:

That’s right, this Thursday @ 8pm CST 7million7years is coming to a web-cam near you! All you need to participate is a PC with sound and broadband connection – AJC has the web-cam!!

Click here for more details: http://7million7years.com/live … should be a ton of fun!

Now, for today’s post …

 

 

CNN Money thinks you only need 7 investments:

  1. A blue chip US-stock fund (track the S&P 500 index) (Fidelity Spartan 500 Index, FSMKX)
  2. A blue chip foreign-stock fund (track the international stock index) (Vanguard Total International Stock Index, VGTSX)
  3. A small company fund (T. Rowe Price New Horizons, PRNHX)
  4. A value fund (Vanguard Value Index, VIVAX)
  5. A high-quality bond fund (Vanguard Total Bond Market, VBMFX)
  6. An inflation-protected bond fund (Vanguard Inflation Protected Securities, VIPSX)
  7. A money-market fund (Fidelity Cash Reserves, FDRXX)

And, I was happy when I saw that Kevin’s article disagreed, saying:

I think that is four to six too many for the average investor … I think Money’s intentions were good here and I don’t have anything personal against the funds they mentioned. (Well, except the Fidelity S&P 500 fund. $10,000 minimum investment? Are you kidding?) I sincerely think seven funds is too much. You end up sharing a lot of the same stocks in many instances.

But, I disagreed for a totally different reason … Money is trying to have you invest in EVERYTHING … and, trying to invest in everything simply doesn’t work for all the reasons that Kevin of No Debt Plan mentions in his post (go read it!).

But, I disagree with Money on this one simply because I hate, hate, hate funds … any, but mostly the ones with fees e.g. Target Funds … which, No Debt Plan tells me can also be bought quite cheaply, if you shop wisely, so maybe I hate them not just for the fees 😉

I mainly hate them, because investing directly in a few select investments is a strategy of the rich and those who want to BECOME rich. Of course, diversifying a little may be a better way to stay rich … I’m still deciding on this one, and will let you know when I pop up for air.

So far, I’m still on the side of not diversifying …

Of course, not everybody wants to be rich (and, I recently found out that some of them still read this blog!), so for them I agree with Money strategy – but, drop the bonds and most of the other funds … just Funds #1 and #2 will do.

I’ve mentioned on this site before that Warren Buffett agrees 100%:

In fact, I was just at his Annual General Meeting in Omaha where he said that IF you don’t want to take the time to learn about investing directly then you should just dollar-cost-average into a broad piece of “American Business” … which he went on to clarify as meaning Fund # 1 (except he specifically named Vanguard for its very low costs, but I know that Fidelity fund is pretty cheap, too).

Here is what Kevin had to say (via e-mail) when he saw my comments on his post:

I believe in diversification for the average joe out there. I just think the 7 funds they picked was stupid especially because it takes more than $24,000 to get started with all of the minimum investments (if you wanted an equally weighted portfolio).

The target fund expense ratio is not bad at all 0.21% for the 2050 fund by Vanguard. Sure it isn’t 0.07% but it also isn’t 1%. For instant diversification starting out… I’ll take it.

I’ve read Buffet’s comments as well. Thinks the average investor should be indexing and I agree. Kind of a set it and forget it deal.

That’s where Kevin’s view and mine part company … we’re on the same page except that I think the ‘average joe’ should aim to get rich and not be indexing/diversifying at all … 

In fact, I was surprised to hear at his Annual General Meeting that Warren Buffett (and Charlie Munger, his partner also agreed) said that he would put 80% of his wealth into ONE investment – surprised because Warren owns 76 businesses and lots of other investments!
But, the reason he later said is that he grew bigger than his investments, so he had to keep buying more.
So, it’s very simple:
1. If you want to be poor, but slightly less poor than you otherwise might be: diversify into American Business a.k.a. buy one, two, or even all seven of Money’s recommendations (just choose the ones with the lowest fees) and wait 20 or 30 years. Actually, not all seven … if you can wait 2 decades, why buy bonds?
2. If you want to get rich, don’t diversify … choose a very few investment, choose them very wisely, and manage them very well! If you can do that you just may very well end up rich … 
Let me leave you with the words of a very wise man, business man, inventor, and famous author:

Behold, the fool saith, `Put not all thine eggs in the one basket’–which is but a manner of saying, `Scatter your money and your attention’; but the wise man saith, `Put all your eggs in the one basket and–watch that basket!‘

The Tragedy of Pudd’nhead Wilson, Chapter 15.
Mark Twain(Samuel Langhorne Clemens) [1835-1910].

PS Keep this post handy, you’ll need Mark Twain’s real name (including middle name for extra bonus points) to win at Trivial Pursuit … after all, you’ll have lots of spare time to play when you’re retired 7 years from now 😉
 

Why do we need middle-men?

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I read an interesting article in the Tycoon Report yesterday … one that I would normally gloss over because it was not their usual meaty, financial “how to” type of article, but it said:

By now must know where I stand on capitalism.  I told you then and I will tell you again that unfettered capitalism is NOT a good thing … the problem with capitalism is that, by design, it rewards deviant behavior.

For example, let’s say that you are a conventional doctor with his/her own practice and you take insurance.  You get rewarded based on how many patients you see, how many drugs you prescribe, and how many procedures (e.g. surgeries) that you do.

Does this make sense to you?
 
Wouldn’t it be better if the doctor were compensated based on how healthy you were?  Or if he got you to stop smoking or to exercise more?  In other words, shouldn’t he be compensated based on making you healthier or keeping you from being unhealthy?  Shouldn’t both of your interests be aligned so that there is no conflict?

An extremist view perhaps, but it was ‘food for thought’ and actually reminded me of something that Warren Buffett said … so I went through my files and dug it up!

In his 2006 letter to shareholders, Warren Buffett was scathing of what he calls “helpers”, that is stockbrokers, investment managers, financial planners and so on”

A record portion of the earnings that would go in their entirety to owners, if they all just stayed in their rocking chairs, is now going to a swelling army of helpers.

Of all places, this was first picked up as a major issue in Australia, because one of Buffett’s targets was the financial planning industry, which has been under the spotlight down-under, resulting in major new controlling legislation for this ‘industry’.

Helen Dent, a director of the Australian Shareholders’ Association, says that she “personally” agrees with Buffett’s scepticism of financial advisers:

Look, let’s face it, most people when they start thinking about investing, they ask their friends and they ask their neighbours and workmates what they’re doing before they get anywhere near an adviser.

The commissions that are paid to financial advisers, that you actually pay, is effectively coming from the producers of the financial products. That’s, on the whole, where the financial advisers are getting the bulk of their income from.

Most financial advisers are tied to financial institutions. That means that the range of products that they suggest to you is often bounded by what the financial institution says they can offer. It’s not bounded by what’s in your best interests.

So, what do you think?

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Should you buy Berkshire Hathaway instead of an Index Fund?

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After yesterday’s post which was aimed squarely at my readers who want to get rich – I hope all of you 😉 – I thought that I should write a follow-up piece aimed at the window-shoppers who are stopping to look at my Get Rich(er) Quick(er) wealth creation ‘catalog’ but have no intention of ‘buying’ …

This question arose as a result of a recent article on Get Rich Slowly  which references the same Warren Buffett quote that that I posted yesterday:

What advice would you give to someone who is not a professional investor? Where should they put their money?
Well, if they’re not going to be an active investor — and very few should try to do that — then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They’re not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don’t buy all at one time.

Get Rich Slowly then went on to say something very interesting:

Buffett has said this time and time again, which is why I’m baffled when people use Buffett as a reason to not diversify. I am not Warren Buffett. Neither are you. Unless you have Buffett’s combination of patience and intense research, you’re better off putting your money in an index fund. (As one reader recently noted, if you can afford to buy a share of Buffett’s company, Berkshire Hathaway, you’re getting the best of both worlds: a diversified portfolio picked by Warren Buffett!)

… which I also commented on yesterday, but it’s the “one reader” comment at the end, that grabbed me.

If Warren Buffett is indeed the World’s Greatest Investor (he is, without a doubt!), and you want to diversify as he recommends, why not forget about the “low cost index fund” option altogether, and jump straight to the top i.e. into Berkshire Hathaway (the company that Warren controls)?

Why?

Because, Warren didn’t recommend it … he’s too ethical to recommend it … in fact, he even says openly that an investor with $1,000,000 can achieve far better returns than he can nowadays, because Berkshire is just too darn big to move quickly and must invest in such large sums that the number of opportunities out there are much smaller for them than for us ‘little guys’.

Of course, the occasional ‘big opportunity’ opens up for Berkshire Hathaway, because of their $60 Billion ‘war chest’ … in the meantime, that $60 Bill. just sits in the bank barely beating inflation.

Even if Warren were still at his ‘smaller, more nimble’ peak, he still would NOT recommend that you do as “one reader” suggests because:

1. You would be buying just ONE stock … admittedly one that has performed well in the PAST and MAY (or may not) perform well in the future, and

2. You would be buying into only a partially-diversified conglomerate … a ‘piece of Warren’ rather than a ‘piece of [the whole of] America’.

So, if you are on the path to saving rather than investing, do what Warren Buffet himself suggests: stick to low-cost index funds …

… only buy any individual stock – including Berkshire Hathaway – if you are in the business of investing and really know what you are doing.

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Don't let all of those stock investment choices fool you …

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People new to the world of finance are often blinded by all the options available for investing in the stock market:

– Direct investments in stocks – but which ones? Growth? Value? Invest far and wide? Or only in a few?

– Trading stocks or options – how to value and trade? Fundamental Analysis? Technical Analysis?

– Investing in packaged products – Mutual Funds? Index funds? ETF’s? REIT’s?

I wrote a post recently that summarized these options; here I simply want to add a little more info …

Investopedia Says:
The building of a factory used to produce goods and the investment one makes by going to college or university are both examples of investments in the economic sense.

This means that the true definition of an investment is something that makes a little money now, or more likely a lot of money in the future.

Therefore, while I say that there are three sensible ways to invest in stocks, there are only two investment methods recommended by Warren Buffet:

1. Buy and Hold low cost, diverse Index Funds (check out Vanguard‘s web-site, and others) – this is a long-term, low risk (if your holding periods are 20 – 30 years) strategy that can help you fund a normal retirement.

“By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals” W. E. Buffett – 19932.

2. Invest in a FEW stocks in companies that are (a) undervalued (b) have a large margin of safety (c) that you love and (d) are prepared to HOLD until the rest of the market decides that they love them, too (at which point you can cash out or keep holding for the long/er term). “I never attempt to make money on the stock market … Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” W. E. Buffett

Anything else is SPECULATING i.e. the process of selecting investments with higher risk in order to profit from an anticipated price movement.
Investopedia Says:
Speculation should not be considered purely a form of gambling, as speculators do make informed decisions before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average.
Lots of people have made a ton in trading stocks and options (e.g. George Soros, but he was smart enough to know to quit gambling when you are ahead) – the key is to be able to make informed decisions …… my question to you is, how informed are youif you are merely following the herd, reading the popular press, drawing trends on a graph  using the same trends that millions of other investors are looking at, doing a rudimentary analysis of the same sets of financials that every analysts worth his salt is poring over?

In short, what is the ‘special sauce’ that you are applying that will let you buck the trend and speculate successfully, like George Soros?
 “A public-opinion poll is no substitute for thought … let blockheads read what blockheads wrote.” W. E. Buffett
And, buying most high-cost Mutual Funds or other packaged products is not investing either …
“We believe that according the name ‘investors’ to [people or] institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’ “ W. E. Buffett

So, take Warren’s advice: unless you have a strong reason to do otherwise, stick to one – or both – of the only two ways of investing in stocks and, over the long-term you are very likely to outperform all but the luckiest of those speculators out there …

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