When news gets out that Warren Buffett buys a certain stock it usually jumps up a few percent. The morning I found out he had bought billions of dollars worth of Apple stock the price went from $90 to $93. Today, close to 2 years later it’s hovering in the $180 range.
You won’t know exactly when he bought it or for how much but you can look up that stock’s price range in the quarter he purchased it. If the price is only 10% higher than the lowest price for that quarter then you may have found a deal. If Warren Buffett puts that much money into a stock he’s betting that it’s going to go up way higher than 10%.
Buffett bought all the major American airlines in the 4th quarter of 2016. By the time I found out about it all of them had gone up significantly in price except American Airlines. Again, I didn’t pull the trigger. The stock went up as high as $59 but came back down to the range of $41 where I first saw it at.
This time I pulled the trigger on American Airlines and Southwest Airlines, $41.60 and $51.40 respectively. I feel good to own some stocks that are Warren Buffett approved. This sounds like amateur hour advice but to me it’s rational. He’s done all of the due diligence for you. A stock pick endorsed by him can only be so bad.
Most people have accepted that they will never be rich. Most people have also accepted that they will be working full-time until they are 65 years old. The reason for this is because the #1 priority for people is to conform.
Don’t be so down on yourself for being afraid to be left out because it’s perfectly human. We may be a civilized society with the luxury of being able to urinate in perfectly clean drinking water but our brain still has the same wiring as it did 100,000 years ago. To be left out of the tribe basically meant death back then. The instinct to fit in makes sense since it would be paramount to survival.
If you do what most people your age do then you’re likely going to end up on a similar path as them every step of the way which means working an undesirable job until you’re 65. It doesn’t sound so bad, right? It doesn’t sound so bad when you’re 20 or even 30 but soon after you’re going to get pretty sick of the daily grind and by that time you might be handcuffed to that life.
Even if you gave most 20-year-olds a recipe to be able to retire by 40 they wouldn’t follow it even if they believed in it. People don’t want to “miss out” on life. Life: nice stuff, vacations, eating out, big wedding, “friends,” you get the point. They’ll just tell themselves it’ll be okay to follow the traditional path. Maybe they believe this or maybe it’s just comforting.
I was 25 years old once. Financial independence in your 40s was too abstract an idea for me to handle. I didn’t want to miss out on life. I didn’t want to make sacrifices or take risks that could potentially oust me from the tribe. I thought following the traditional path was what life was all about.
Financial independence at a relatively early age puts you way ahead of everyone. If you want to be exceptional then you can’t be doing what everyone else is doing.
The S&P 500 index could be referred to as the benchmark for investing returns. In order to justify managing your own money or paying someone else, your returns have to beat this index otherwise you’re better off putting your money in a low fee S&P 500 index fund(Vanguard, Spyder).
The chart below indicates if you had put your money in at anytime in the last 90 years(except in the last couple months) you would have seen a return from your investment. There were better years than others but as long as you held you would have made money.
Although it’s next to a sure thing that you will make money if you’re in it for the long term you probably wouldn’t want to pile in all of your money at once unless if the market has took a huge beating like in early 2009.
If you had piled in all of your money at the peak of the tech boom in the year 2000 you would have seen your investment get cut by close to half at the bottom of the tech bust the following year.
That decade wasn’t the best for a long term investor due to the Great Recession that followed in 2008. The index rose back to its high after the tech bust only to get slammed even worse. It’s like falling madly in love only to get heartbroken and then have it happen all over again soon after you recovered.
If you weathered the storm until today though you’re in love again. In 2001 the index at its peak was at around 1500 points and in 2018 it’s been in the 2500-2800 range.
Instead of piling in all at once a more prudent strategy would be to put smaller portions every month so that you hedge against having all of your money invested at the top. Sure, if you go all in at once you’ll more than likely see your investment above water one day but in the case presented above you would have had to wait until 2013 to see a gain from your 2001 investment. That sucks.
If the index has taken a bad beating already though it’s probably a strategic move to put in more money than you usually would. Buying at the bottom is how you get the largest returns.
A big reason why so many people don’t invest their money in the markets is because it’s something you can put off and not hate yourself for until way down the road. Many have no qualms with owning real estate because it’s almost a tradition plus you need somewhere to live anyway. Just as many celebrate the idea of marriage even with the significant failure rate. Statistically your odds at winning in marriage are about 10 percentage points higher than a typical casino game. Do you feel lucky chump? Well, do you?
Fortunately, the S&P 500 index does not care if you do not take out the garbage or if you gain 70 pounds. Like marriage, it too has its ups and downs but if you stick it out you will be victorious in the end if the last 90 years has anything to say about it.
2001 and 2008 were rough years but we pulled through baby!
What if I lose all of my money?
The S&P 500 is comprised of 500 of the largest publicly listed companies companies in America. If they fail life is over anyway.
Sure, it’s all been good up until now but how do I know the trend will continue?
The truth is you don’t know for sure but this is almost as close as a guarantee you’re going to get. There are no guarantees in life but you have to side with the most rational decisions.
How much am I going to get back in 30 years?
The answer to this is unknown but you can reasonably expect somewhere in the neighborhood of an average of 5 to 10% annually. Much of this depends on how you invest into it.
The data below shows the annual returns of the index since 1988. As you can see there are many more positive years than negative.
If this hasn’t been compelling enough because I’m just some schmuck blogger then you can put your trust in Warren Buffett. He advises that 99% of people should invest in a low cost S&P 500 index fund such as a Vanguard fund and they’ll do great in the long run. Also, when he dies he has planned for 90% of his money to be put in such a fund for his wife.
Warren Buffett says 99% of people should not pick stocks. If I listened to him I would have a lot less money but at the same time I’m not comfortable with picking 100% of my portfolio’s stocks.
When I look back at the times it made sense for me to pick a stock to buy, those times were few and far between. If you are going to pick a stock I would advocate patience because 99% of us may not be good at picking stocks all the time.
In 2003 a textbook for college costed $120 at the school bookstore. Being cheap and poor I didn’t want to pay that so I searched the internet with the small hope that I might find a deal. This Amazon company had the same book brand new advertised for half the price. I ordered it and it was delivered on time as promised. I thought, wow, this is such a great service. That may have been the sign to buy the stock. Do I have to tell you where the stock is today?
I didn’t come across another company that I thought would be a great buy until 7 years later. Dollarama, a Canadian dollar store, had gone public recently. I remember hearing on the radio about it while getting ready for work. I’ve always thought Dollarama was a great business. Every time I went in there I ended up buying way more than I intended to, and did I mention that I’m cheap. Today the stock has gone 15 times since the IPO. I ended up buying the stock in 2015 and still made a good return.
Luckily, in 2015 I bought in early on Canadian marijuana companies. I had some knowledge about the business and consumers from growing up with a few potheads and drug dealers.
Another Warren Buffett line is buy what you know. Sometimes it’s just that simple. Not always but sometimes.
Do you have any interesting stock picking stories?