BERKSHIREHATHAWAYdotCOM....Brinker devoted the opening monologue to Warren Buffett - Berkshire-Hathaway. Buffett's latest "letter to shareholders" is available at the link above.
Brinker comments: A lot of the investments that have been made by the Sage of Omaha have done very well. As usual, in his shareholder newsletter this year, he talks about the best years being ahead for the USA. He also makes an interesting point that stocks will always be more volatile than many other investments… like bonds. But he disagrees with business school teaching that volatility is synonymous with risk.… I can understand while he feels that way because of how much money he's made in equities over the past 50 years…
WARREN BUFFETT, RAGS TO RICHES....Brinkr continued: I remember reading that the first purchase that Warren Buffett made, the New England-based Berkshire Hathaway company was basically 100 shares at seven dollars. A $700 investment… And if you go back to the beginning of Berkshire Hathaway in 1964, you will see the book value was $19 a share and today the book value is $146,000 per share -- giving Warren Buffett a 50 year record of 21.6% compounded annual growth of book value of his company. Over that same 50 years, the S&P 500 rose at a compound annual rate of about 10%. So he basically doubled up on the annual rate in return of the S&P 500. Just a small investment in the company 50 years ago is now worth a lot of money.
BOND MARKET DURATION...In answer to Stan's question about bond funds, Brinker replied: I would check the duration on the funds. I think that in the economy we are in right now, that is the most important thing to be aware of. If it has long-term duration, what that is going to mean is, if you get a normalization of rates down the road, you are going to be taking net asset-value-risk that you may not want to take.… Right now, we are using an average duration of less than two in our income portfolio in the investment letter.
INVESTMENT RISK GUIDELINES: BALANCE ASSET ALLOCATION...Carl asked how to manage risk in retirement to preserve Critical Mass......Brinker replied: We use a guideline for a balanced portfolio. A conservative guideline would be 30% to 50% in equities. A more aggressive guideline would be 50% or more inequities -- that's a rough guideline. I would say 30 to 50 would be conservative – 50% to 70% would be aggressive and the midpoint all the way down that line is going to be 50-50.… One way to minimize volatility is to decrease the amount you're going to place in the stock market.
AND DIVERSIFY....Brinker continued: The other answer is diversification. You are going to have a broadly diversified portfolio -- and as a consequence, you are going to have most of your money in US stocks. You are going to have some of your money in international stocks. You are going to have fixed income securities in there. In a balanced portfolio you are going to have some volatility when things go against you, but it's not going to be comparable to somebody who is 100% in the stock market.
ALTERNATIVE TO RISK IS NOT ATTRACTIVE...Brinker continued: Now in this zero interest rate world we live in, the alternative is particularly unattractive – and that is the alternative of just keeping your money in short-term AAA rated securities. The problem with that is, there is very little in the way of investment return in the current situation where the Federal Reserve is keeping rates close to zero. So that's the answer – diversification and asset allocation.
SHOULD INVESTORS STRIVE TO OUTPERFORM THE MARKET..... Caller John asked if it was a good idea to try to outperform the total stock market. Brinker replied: the answer is no. I don't think an investor should ever be preoccupied with trying to outperform the market given the difficulty of trying to do so over the long term -- especially. But I think that investors should over the long-term try to do as well as the market. And I think that can be done – and I think that is really the bottom line. I think those investors that are preoccupied with trying to beat the market run the risk of taking too much risk in their portfolio in order to do it.
WHY PAY FOR ADVICE AND NOT EVEN KEEP UP WITH THE MARKET....Caller John followed up: "What are we paying for? All these mutual funds and investment advisers, a look at these management fees and all these loads. What are we paying for if their expertise is not getting as the results that are better than just buying the diversification of an index fund. Why are we paying all this money?"
HAND-HOLDING, BABYSITTING, COMPANY ON THE JOURNEY COSTS MONEY....Brinker replied: I think that the people that pay all that money, basically, are paying for hand holding. It's like having a pacifier to go to when you feel pain.… John makes a really good point and that is, that the people who are out there promising you that in return for large management fees that they are going to beat the market, they are probably not going to beat the market. You pay the fees but they are not going to beat the market. In fact if you check, you'll see that a lot of them don't do as well as the market over the long-term. So what do you pay for -- the answer has to be babysitting. The answer has to be company along the journey. What else could be the answer? I think it's a reasonable.
Honey EC: So now we know why people pay for newsletters that don't match the market. You have to go back many years before Brinker's Marketimer model portfolios matches the S&P 500. It certainly didn't happen in 2014. Here are his performance numbers for 2014.....Note that owning Vanguard Total Stock Market Fund returned 12%:
Marketimer Portfolio I: 8%Jim has some comments also:
Marketimer Portfolio II: 8%
Marketimer Portfolio III: 6% (balanced portfolio of equity and fixed-income securities)
Vanguard Total Stock Market: 12% (VTSMX)
QUESTIONABLE ETF INFORMATION ABOUT MARKETIMER....Brinker said: I publish a list of Exchange Traded Funds in the investment letter and those represent funds that I'm certainly comfortable with within the context of Exchange Traded Funds. And we also have an Exchange Traded Fund portfolio – an alternate active-passive portfolio in the newsletter.
Honey EC: I had to listen to this answer a couple of times before it became clear that Brinker was not referring to a model portfolio, but to the "active-passive" portfolio that almost never changes, which consists of 80% in VTSMX and 20% in VFWIX -- and he includes the corresponding ETFS: VTI AND VEU. Mystery solved -- that's the portfolio he is talking about. But the other reference to his list of ETFs has to be the Individual Issues list that is strictly off-the-books and is a mostly just mainstream index ETFs.
Brinker made comments about the "dysfunctional congress" extending the Homeland Security vote for one week. Some comments have been posted. Here are JM's
Frankj's Summary of Third-Hour Guest Speaker:
Charlie Ellis was Bob’s third hour guest today, March 1, 2015. Charlie is the author of a new book titled, Falling Short, the Coming Retirement Crisis and What To Do About It. (Co-authors: Alicia Munnell and Andrew Eschtruth). Charlie has been on the program before, but as Bob noted it has been a long time.
Half the people who work for private companies work for small ones that are not able to offer retirement benefits. Among the other half, chances are the retirement plan is a 401K plan, not a traditional defined benefit plan. Charlie said this is not a good thing. Placing the employee in charge of creating his own adequately-funded retirement program has not worked out when you consider that at age 65, the MEDIAN value in 401K plans is just $110,000.
Prior to 401K plans, the company offering a pension plan did all the work. The funded it, chose the managers and changed them when necessary. All the employee had to do was tell the company where to send the pension checks when he or she retired. All that has changed and the employee is now responsible for understanding the risks involved in fund choices, how much to invest, when to re-allocate, when to begin drawing out, how much to draw out. Ellis said individuals are simply not trained to make these type of decisions. Combine this with his prediction that the next 10 years return (in the market) will be “below normal,” and the result is, many people will not be able to fund a successful retirement.
Charles and Bob got on the subject of fees. The guest likened fees to termites which gradually eat away at a structure and, given enough time, can do considerable damage. A one percent fee as a portion of ASSETS may sound like very little. Now look at it as a percent of say, a 7% RETURN. The one percent management fee just ate up 15% of your return.
How long should people work? Mr. Ellis said he’s 77 and still working a 70 hour week. He recommends people stay in the work force until age 70 if they are able. If you can plan for it, good that’s better than suddenly finding out you have to. Charlie touched on the subject of when to take Social Security and he is in the camp of last week’s guest, wait until you are 70 if you can.
Bob Brinker took a detour and brought up a peeve he has with some private schools that build up huge endowment funds. The guest took a different view on this, calling these endowments one of the best value propositions the American people have ever had. He waxed on about how the schools use the money to do research and referred to the help Yale gives deserving undergrads ($10,000) per year. He referred to the use of the endowment money as a “great bargain for our nation.”
Al from San Jose is age 64 and saved for his own retirement, he has no pension plan. He asked a rhetorical question, why didn’t the information on the state of retirement funding go out 20 years ago? This is where the guest cited the $110,000 number given above.
Scott in Columbia, MO sounded a bit under the weather asking what happens after 30 years if you give them 1% a year? Bob interceded with a question on another favorite topic of his, his theory that with the government having clamped down on insider trading, hedge fund returns have suffered. Again, Charlie Ellis did not take the bait. He said you have to look at the reporting of the numbers. Hedge funds don’t have to report their returns so poor performance is not reported. Good performance on the other hand attracts more people into the business, making it more competitive which can lead to lower returns for all.
Jim from Colorado Springs, CO objected to a one-size-fits-all approach to Social Security. He may have been thinking about last week’s guest who recommended people wait until age 70, as well as Charlie’s earlier-stated opinion. Jim said maybe someone wants to preserve a retirement account to leave to children and this could be a valid reason for substituting SocSec income for retirement distributions. Sure enough, before Ellis could answer, Bob jumped in with his own opinion that one should NOT plan to leave a legacy from retirement money. Charlie advised that people not take a general statement like “wait until 70” and act on it when there is specific advice available for their own situation – advice that takes into account assets as well as family longevity. (One might also apply Charlie’s view to Bob Brinker’s oft-stated general objection to people planning to leave a legacy to heirs using retirement money!)
Gary from Las Vegas rolled the dice with a question on limiting the money in retirement accounts. Would Mr. Ellis put a limit on it as was proposed recently by the White House? Answer: NO.
By way of wrap up, the guest said that lots of smart people have gotten into the business in the last 50 years. Whereas you used to have to call a broker to learn the price of a stock, now stock prices are ubiquitous. The SEC requires that a publicly traded company disclose material information simultaneously, to everyone. Active investors have gotten so good at what they do that it is nearly impossible from them to outperform the overall market. Sixty percent of mutual funds underperformed in the last 12 months. If you go back further, these numbers increase: 70% underperformed over a 10 year period, and 80% over a 20 year period.
Brinker's guest-speaker was Charles Ellis: Falling Short: The Coming Retirement Crisis and What to Do About It
Honey here: Thanks Frankj...Very interesting guest and a great summary!
Jeffchristie's Moneytalk Final Exam Question:
Which one of the following stories in the news this week did Bob Brinker NOT cover today?
A) Warren Buffet's annual newsletter.
B) Home land security funding.
C) Veto of the Keystone pipe line bill.
D) Janet Yellen's Congressional testimony.
Honey here: Thanks Jeff....I have noticed that since the newly-elected congress passed the Keystone Pipeline Bill, Brinker hasn't said anything about it. Whereas before, he has talked about it at length and has gone so far as to call it a "no-brainer" for Obama to sign. And as the answer to your question shows, he didn't talk about Obama vetoing the Bill. Guess he wants those dangerous trains to keep on running -- adding to Warren Buffett's $billions.
San Francisco, Ca. KSFO 560: 2-4pm UPDATE January 2015: KSFO no longer carries the first hour of Moneytalk. KSFO archives Moneytalk (2pm & 3pm) Free on Demand for seven days after broadcast.
(Summary posted at 6:50 PT)
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