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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Guizmo on February 24, 2014, 08:29:27 AM

Title: Buffett's Annual Letter
Post by: Guizmo on February 24, 2014, 08:29:27 AM
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/?iid=Lead

Lots o' good nuggets here:

"Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits -- and, worse yet, important to consider acting upon their comments."

"A "flash crash" or some other extreme market fluctuation can't hurt an investor any more than an erratic and mouthy neighbor can hurt my farm investment. Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy."

" In the 20th century, the Dow Jones industrial index advanced from 66 to 11,497, paying a rising stream of dividends to boot. The 21st century will witness further gains, almost certain to be substantial. The goal of the nonprofessional should not be to pick winners -- neither he nor his "helpers" can do that -- but should rather be to own a cross section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal."
Title: Buffett's annual letter excerpt
Post by: AdrianC on February 24, 2014, 08:30:13 AM
Nice article by Buffett:
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

Condensed version: Non-professional investors are better off in a low-cost S&P500 index fund.
Title: Re: Buffet's Annual Letter
Post by: arebelspy on February 24, 2014, 08:40:31 AM
[Moderator Note: Merged duplicate threads.]
Title: Re: Buffett's annual letter excerpt
Post by: Vjklander on February 24, 2014, 11:11:57 AM
Nice article by Buffett:
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

Condensed version: Non-professional investors are better off in a low-cost S&P500 index fund.

Even better, buy BRKB
Title: Re: Buffett's annual letter excerpt
Post by: matchewed on February 24, 2014, 11:14:39 AM
Nice article by Buffett:
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

Condensed version: Non-professional investors are better off in a low-cost S&P500 index fund.

Even better, buy BRKB

Kinda misses Buffet's point. Individual stocks have risks that a non-professional investor either doesn't understand or doesn't have the information to know of the risks. Even BRKB has that risk. The best advice is for low cost index funds in your chosen AA.
Title: Re: Buffet's Annual Letter
Post by: Will on February 24, 2014, 11:31:30 AM
[Moderator Note: Merged duplicate threads.]

Can the moderator please correct the spelling of Warren Buffett's name please?
Title: Re: Buffett's annual letter excerpt
Post by: AdrianC on February 24, 2014, 12:06:52 PM
Even better, buy BRKB

I'm with you, but it's interesting that on Buffett's passing his wife gets cash which he recommends is invested 10% cash, 90% S&P500 index.

He'd never recommend that anyone buy BRK, and she'll have plenty to live on, I'm sure.

IMHO, right now BRK is a better buy than an index fund. It's not always. We have both.
Title: Re: Buffett's annual letter excerpt
Post by: Vjklander on February 24, 2014, 12:25:13 PM
Nice article by Buffett:
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

Condensed version: Non-professional investors are better off in a low-cost S&P500 index fund.

Even better, buy BRKB

Kinda misses Buffet's point. Individual stocks have risks that a non-professional investor either doesn't understand or doesn't have the information to know of the risks. Even BRKB has that risk. The best advice is for low cost index funds in your chosen AA.

Not really.  Berkshire owns numerous top-notch companies outright. That is much more than their stock investments. How many of your funds can claim that?
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 24, 2014, 01:31:25 PM
Nice article by Buffett:
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

Condensed version: Non-professional investors are better off in a low-cost S&P500 index fund.

Even better, buy BRKB

Kinda misses Buffet's point. Individual stocks have risks that a non-professional investor either doesn't understand or doesn't have the information to know of the risks. Even BRKB has that risk. The best advice is for low cost index funds in your chosen AA.

Not really.  Berkshire owns numerous top-notch companies outright. That is much more than their stock investments. How many of your funds can claim that?

That doesn't change the risks associated with a company. A conglomerate has as many risks as an individual company, perhaps more. Just because my index fund cannot claim outright ownership in companies doesn't mean I don't reap the benefits of the gains of those companies. I understand it looks rosy right now. But for my 60+ year time frame for investing and wealth growth I'll look to index funds over BRKB any day. Less long term risk in the index fund.
Title: Re: Buffett's Annual Letter
Post by: warfreak2 on February 24, 2014, 02:01:35 PM
Unless you're going to buy Berkshire outright, it hardly matters that they own several companies outright. You personally will still own a very small percentage.

After that, all you'd really be bragging about is having high exposure to a few particular companies which you think will do well, which sounds more like individual stock-picking than diversification to me.

You think they will do well, and so does everyone else - therefore this fact is already represented in their share prices today. To beat the market, you need to know something that everyone else doesn't know, or won't correctly act on.
Title: Re: Buffett's Annual Letter
Post by: aclarridge on February 24, 2014, 02:14:58 PM
I'm amazed that Buffett recommends index investing over investment in his own company. It's telling.

The only thing that scares me about index investing is that as a long term strategy, I can't see a scenario where it ends up doing badly. And if it seems too good to be true...
Title: Re: Buffett's Annual Letter
Post by: Grateful Stache on February 24, 2014, 04:11:44 PM
I read it earlier today; great article!

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's. (VFINX)) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers."
Title: Re: Buffett's Annual Letter
Post by: MgoSam on February 24, 2014, 11:12:56 PM
Absolutely great article. A question I"ve had for Berkshire stock, how much of it do you think would change after Mr. Buffet's demise? I hate thinking in that terms, but aside from him and Mr. Munger, how reliable are Berkshire managers?
Title: Re: Buffett's Annual Letter
Post by: RaveOregon on February 25, 2014, 06:28:09 AM
Absolutely great article. A question I"ve had for Berkshire stock, how much of it do you think would change after Mr. Buffet's demise? I hate thinking in that terms, but aside from him and Mr. Munger, how reliable are Berkshire managers?


From Buffett's 2012 letter to shareholders:
http://www.berkshirehathaway.com/letters/2012ltr.pdf

"Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of
integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We
hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in
the dust as well


Consequently, we have increased the funds managed by each to almost $5 billion (some of this emanating
from the pension funds of our subsidiaries). Todd and Ted are young and will be around to manage
Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they
take over."

They sound like they are going to be quite reliable. They have Buffett's confidence at least.
Title: Re: Buffett's Annual Letter
Post by: warfreak2 on February 25, 2014, 09:18:25 AM
A question I"ve had for Berkshire stock, how much of it do you think would change after Mr. Buffet's demise?
Not very much, unless it was unexpected. Anything predictable is already represented in the stock price today.
Title: Re: Buffett's Annual Letter
Post by: SwordGuy on February 25, 2014, 09:36:16 AM
I'm amazed that Buffett recommends index investing over investment in his own company. It's telling.


He didn't.  He recommended it for people who aren't knowledgeable investors. 
I looked into buying stock in his company a few years back and it took a sizeable chunk of change, something the average non-knowledgeable investor probably doesn't have to invest in the first place...
Title: Re: Buffett's Annual Letter
Post by: KingCoin on February 25, 2014, 09:52:14 AM
I'm amazed that Buffett recommends index investing over investment in his own company. It's telling.


He didn't.  He recommended it for people who aren't knowledgeable investors. 
I looked into buying stock in his company a few years back and it took a sizeable chunk of change, something the average non-knowledgeable investor probably doesn't have to invest in the first place...

Ultimately, I think he's confident that BRK valuation will reflect it's earning power over the long haul. He doesn't need to be a cheerleader for the stock in order to generate short term interest. This is also evidenced by the fact that he doesn't splip the stock to encourage short term trading and small time speculators.
Title: Re: Buffett's Annual Letter
Post by: skyrefuge on February 25, 2014, 10:22:30 AM
I'm amazed that Buffett recommends index investing over investment in his own company.

Actually, he's recommending both simultaneously (especially since he particularly recommends the S&P 500 as the index fund you should invest in). About ~1.2% of every share of VFINX is a stake in Berkshire Hathaway; it's one of the largest components of any S&P 500 index fund. So I own about $5000 worth of BRK.B without even trying to.
Title: Re: Buffett's Annual Letter
Post by: soccerluvof4 on February 25, 2014, 10:23:19 AM
Exactly ^+1 Kingcoin,  and the chatter alone on anything he writes gets people to look at his holding anyhow. Not to mention he is on Squawk Box and everything else regularly and so many people refer to it.  I think he would lose respect if he was simply a cheerleader of his own Stock/fund with all of his exposure not to mention it just doesn't seem to be what hes a bout.
Title: Re: Buffett's Annual Letter
Post by: Vjklander on February 25, 2014, 10:30:08 AM
I'm amazed that Buffett recommends index investing over investment in his own company. It's telling.


He didn't.  He recommended it for people who aren't knowledgeable investors. 
I looked into buying stock in his company a few years back and it took a sizeable chunk of change, something the average non-knowledgeable investor probably doesn't have to invest in the first place...

Ultimately, I think he's confident that BRK valuation will reflect it's earning power over the long haul. He doesn't need to be a cheerleader for the stock in order to generate short term interest. This is also evidenced by the fact that he doesn't splip the stock to encourage short term trading and small time speculators.

That was the whole point of creating BRK-B
Title: Re: Buffett's Annual Letter
Post by: Dr. A on February 25, 2014, 10:30:10 AM
Absolutely great article. A question I"ve had for Berkshire stock, how much of it do you think would change after Mr. Buffet's demise? I hate thinking in that terms, but aside from him and Mr. Munger, how reliable are Berkshire managers?


From Buffett's 2012 letter to shareholders:
http://www.berkshirehathaway.com/letters/2012ltr.pdf

"Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of
integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We
hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in
the dust as well


Consequently, we have increased the funds managed by each to almost $5 billion (some of this emanating
from the pension funds of our subsidiaries). Todd and Ted are young and will be around to manage
Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they
take over."

They sound like they are going to be quite reliable. They have Buffett's confidence at least.

He's also stated in previous letters that his duties as Chairman and chief investor will not be given to the same person when his time comes. His top choice for chairman is not public information (the board of directors knows). However, the smart money is on Ajit Jain, who built the Berkshire Hathaway reinsurance business, and (one could argue) is almost as  responsible for Berkshire's success as Buffett himself. As Buffett tells it in his letters, Jain is cut very much from the same cloth as the big man, so it's possible very little will change. "Corporate culture" is not just a buzz word with those guys.

I've long wondered if Buffett's death might present an amazing buying opportunity for BRK, as people who don't understand the company bail out or short it.
Title: Re: Buffett's Annual Letter
Post by: KingCoin on February 25, 2014, 11:59:43 AM
That was the whole point of creating BRK-B

The point of creating B shares was to 1) allow gifting without triggering taxes and 2) to stave off competitors who were going to create a trust that sold fractional A shares. Believe me, Buffett has no interest in encouraging retail punting in the stock. B shares have less voting rights, for what it's worth.
Title: Re: Buffett's Annual Letter
Post by: Poorman on February 25, 2014, 02:29:58 PM
I'm amazed that Buffett recommends index investing over investment in his own company. It's telling.

The only thing that scares me about index investing is that as a long term strategy, I can't see a scenario where it ends up doing badly. And if it seems too good to be true...

Study history and you'll find plenty of multi-decade periods where stocks did poorly.  We are currently 14 years into one of them.

http://www.businessinsider.com/stocks-for-the-long-run-dow-japan-2012-6
Title: Re: Buffett's Annual Letter
Post by: dmn on February 25, 2014, 03:21:42 PM
Study history and you'll find plenty of multi-decade periods where stocks did poorly.  We are currently 14 years into one of them.

http://www.businessinsider.com/stocks-for-the-long-run-dow-japan-2012-6

What I don't like is how the quoted article bases his arguments on real stock prices neglecting dividends. A sideways market for inflation-adjusted stock prices delivers returns below historical norms, but investors still get the dividend.

Japan is a somewhat special case - with peak P/E ratios about 100, the usually quoted reference point ("still x% below its peak value in 1989") is hopelessly warped. I am not sure that the bursting Japanese asset bubble tells us anything about the risks of buying stocks at a P/E of 20 or less.
Title: Re: Buffett's Annual Letter
Post by: grantmeaname on February 25, 2014, 07:38:42 PM
The Dow is absolutely moronic. IBM influences the Dow more than any other company for no good financial reason and the author abuses that to sell his moronic ideas to unsuspecting readers. Pull that graph up with a real cap-weighted broad index and the "lost 1.4 decades" disappear.
Title: Re: Buffett's Annual Letter
Post by: Nords on February 25, 2014, 10:56:39 PM
Nice article by Buffett:
http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/
Condensed version: Non-professional investors are better off in a low-cost S&P500 index fund.
Even better, buy BRKB
Kinda misses Buffet's point. Individual stocks have risks that a non-professional investor either doesn't understand or doesn't have the information to know of the risks. Even BRKB has that risk. The best advice is for low cost index funds in your chosen AA.
Not really.  Berkshire owns numerous top-notch companies outright. That is much more than their stock investments. How many of your funds can claim that?
We've been watching Berkshire Hathaway since the late 1990s and we've been owners since 2001.  Buying BRK shares is still single-stock risk, no matter how good people think the "top-notch" companies may be.  Tyco and Enron were also made up of underlying companies, too. 

Jeff Matthews' "Pilgrimage" had a number of interesting observations about Berkshire's sacred cows (like Nebraska Furniture Mart and See's Candies).  Alice Schroeder used to track some horrifying stories of NetJets on her blog.  Kirby vacuum cleaners are facing persistent lawsuits about their sales approach.  MidAmerican Energy is killing salmon all over the Pacific Northwest.

Buying BRK shares is just part of a diversified portfolio.  Of course I may just be talking down my book so that I can buy cheap shares from the rest of you.

Absolutely great article. A question I"ve had for Berkshire stock, how much of it do you think would change after Mr. Buffet's demise? I hate thinking in that terms, but aside from him and Mr. Munger, how reliable are Berkshire managers?
There'll be a short, sharp drop... unless Caribbean cruises, alcohol, and prostitutes are involved, in which case it'll be a longer, sharper drop.  After a few months the share price will start to recover.  If/when the board declares a dividend, the share price will soar.

Confusion is tied to BRK's announcement that they'll buy back their shares at 110% of book value.  (That's roughly $95/share for the "B" shares, about $15-$20 below the usual share price.)  People widely expect that BRK will prop up the price at book value, but that's no guarantee.  Part of me wants to keep selling puts around that $95/share strike so that I'm always ready to scoop up a bargain.

That was the whole point of creating BRK-B
The point of creating B shares was to 1) allow gifting without triggering taxes and 2) to stave off competitors who were going to create a trust that sold fractional A shares. Believe me, Buffett has no interest in encouraging retail punting in the stock. B shares have less voting rights, for what it's worth.
The latest reason for splitting the value of the B shares was to allow exchanging them for shares of BNSF when the purchase was tendered.  Buffett really hates paying with BRK shares, but he really really wanted to own BNSF.
Title: Re: Buffett's Annual Letter
Post by: aclarridge on February 26, 2014, 09:59:01 AM
I'm amazed that Buffett recommends index investing over investment in his own company. It's telling.

The only thing that scares me about index investing is that as a long term strategy, I can't see a scenario where it ends up doing badly. And if it seems too good to be true...

Study history and you'll find plenty of multi-decade periods where stocks did poorly.  We are currently 14 years into one of them.

http://www.businessinsider.com/stocks-for-the-long-run-dow-japan-2012-6

I consider long term 30 years or more. Also, index investing in general to me means going international. There's not much history of being able to do this at low cost, but if you just look at major markets over the last 100 yrs I don't think it's possible to have done badly following that simple strategy. You can come up with examples where somebody buys their entire portfolio the day before a massive crash, and then the portfolio doesn't recover for 10-20 years. But in all of those cases afaik a more global portfolio would have done fine.

US stocks have done reasonably well in the last 14 years. Plenty of people around here have had their accumulation phase during this time and are now FI in no small part due to pretty good market returns.
Title: Re: Buffett's Annual Letter
Post by: Poorman on February 26, 2014, 12:00:18 PM
The Dow is absolutely moronic. IBM influences the Dow more than any other company for no good financial reason and the author abuses that to sell his moronic ideas to unsuspecting readers. Pull that graph up with a real cap-weighted broad index and the "lost 1.4 decades" disappear.

Ah, so when index investing is shown not to work, blame the index?


US stocks have done reasonably well in the last 14 years. Plenty of people around here have had their accumulation phase during this time and are now FI in no small part due to pretty good market returns.

I'm not sure what your basis is for saying that.  The SPY ETF has returned about 3.5% per year over that time, dividends included.  Most people have done well for the past 5 years, but for those not just starting out, a lot of this bull run was recouping prior losses.
Title: Re: Buffett's Annual Letter
Post by: arebelspy on February 26, 2014, 12:08:49 PM
The Dow is absolutely moronic. IBM influences the Dow more than any other company for no good financial reason and the author abuses that to sell his moronic ideas to unsuspecting readers. Pull that graph up with a real cap-weighted broad index and the "lost 1.4 decades" disappear.

Ah, so when index investing is shown not to work, blame the index?


US stocks have done reasonably well in the last 14 years. Plenty of people around here have had their accumulation phase during this time and are now FI in no small part due to pretty good market returns.

I'm not sure what your basis is for saying that.  The SPY ETF has returned about 3.5% per year over that time, dividends included.  Most people have done well for the past 5 years, but for those not just starting out, a lot of this bull run was recouping prior losses.

Except that they likely would be putting in more now than when they were younger, therefore they probably made more on the last 5 years upside than they did on the previous 5 years.  Even if the results ended up only being +3.5%, they likely ended up ahead of that, no?
Title: Re: Buffett's Annual Letter
Post by: aclarridge on February 26, 2014, 12:13:51 PM

US stocks have done reasonably well in the last 14 years. Plenty of people around here have had their accumulation phase during this time and are now FI in no small part due to pretty good market returns.

I'm not sure what your basis is for saying that.  The SPY ETF has returned about 3.5% per year over that time, dividends included.  Most people have done well for the past 5 years, but for those not just starting out, a lot of this bull run was recouping prior losses.

Imagine you started investing 14 years ago, reinvesting quarterly and averaging into say a 70/30 stock/bond portfolio. I'm not sure what the return would be but I know it's better than 3.5% annualized. And hell, 3.5% annualized is better than inflation and if that's some kind of worst-case-scenario then that's not bad.

Again, when you pick a point in time right before a big crash, make that your cost basis, and compare returns afterward things aren't going to look as rosy. You have to be extremely unlucky to pick that point in time to invest everything you've got though which is why it's a silly argument to make.
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 26, 2014, 12:26:28 PM
The Dow is absolutely moronic. IBM influences the Dow more than any other company for no good financial reason and the author abuses that to sell his moronic ideas to unsuspecting readers. Pull that graph up with a real cap-weighted broad index and the "lost 1.4 decades" disappear.

Ah, so when index investing is shown not to work, blame the index?


Yes, if it is a bad index you do blame it. Because of composition a broader index than 30 companies arbitrarily chosen will perform differently and have risks that are easy to mitigate with a broader more diversified index. Like in any other mutual fund there will be ones that are chosen which will perform well or poorly in a given time frame. That is not the fault of the strategy but the fund. Index fund investing is traditionally advocating a S&P500 or Total Market fund. If someone decides to use a much narrower (read less diversified) fund, it will have more volatility and it will be easier to find these lost periods. As Grant said run the numbers on a broader index such as the total market. Do you see the same issue?
Title: Re: Buffett's Annual Letter
Post by: Poorman on February 26, 2014, 01:05:15 PM
Except that they likely would be putting in more now than when they were younger, therefore they probably made more on the last 5 years upside than they did on the previous 5 years.  Even if the results ended up only being +3.5%, they likely ended up ahead of that, no?

I would say it depends on the person and their skill sets.  The past 5 years have shown flat to declining incomes and long stretches of unemployment for many people.  Besides you are talking from your own perspective, the perspective of somebody in the accumulation phase.  What about somebody that achieved FI prior to the collapse?  Your argument doesn't apply to them.


Imagine you started investing 14 years ago, reinvesting quarterly and averaging into say a 70/30 stock/bond portfolio. I'm not sure what the return would be but I know it's better than 3.5% annualized. And hell, 3.5% annualized is better than inflation and if that's some kind of worst-case-scenario then that's not bad.

Again, when you pick a point in time right before a big crash, make that your cost basis, and compare returns afterward things aren't going to look as rosy. You have to be extremely unlucky to pick that point in time to invest everything you've got though which is why it's a silly argument to make.

You're right that adding bonds to the portfolio increases the performance, because bonds outperformed stocks over the past 14 years.  That's not what Buffett recommended though, is it?


Yes, if it is a bad index you do blame it. Because of composition a broader index than 30 companies arbitrarily chosen will perform differently and have risks that are easy to mitigate with a broader more diversified index. Like in any other mutual fund there will be ones that are chosen which will perform well or poorly in a given time frame. That is not the fault of the strategy but the fund. Index fund investing is traditionally advocating a S&P500 or Total Market fund. If someone decides to use a much narrower (read less diversified) fund, it will have more volatility and it will be easier to find these lost periods. As Grant said run the numbers on a broader index such as the total market. Do you see the same issue?

Yeah, so how do you explain why the S&P has more or less tracked the performance of the Dow over each of the periods discussed?  If the author had chosen to use the S&P, the results of the analysis would have been the same.  Same with the Wilshire 5,000 or any other US stock index.  They are all highly correlated.
Title: Re: Buffett's Annual Letter
Post by: arebelspy on February 26, 2014, 01:09:45 PM
Except that they likely would be putting in more now than when they were younger, therefore they probably made more on the last 5 years upside than they did on the previous 5 years.  Even if the results ended up only being +3.5%, they likely ended up ahead of that, no?

I would say it depends on the person and their skill sets.  The past 5 years have shown flat to declining incomes and long stretches of unemployment for many people.  Besides you are talking from your own perspective, the perspective of somebody in the accumulation phase.  What about somebody that achieved FI prior to the collapse?  Your argument doesn't apply to them.

Okay, so in the accumulation phase seems we're good with the market.  Glad we agree there.

Now.. Have you talked with many people that ER'd around that time?  I have read of many of them.  Most are doing just fine.  See Nord's posts, for example.  Go to the E-R.org forums for hundreds of their stories.

Anecdotes, yes, but I'd wager someone savvy enough with finances to ER would have done fine.  Those that didn't would have kept contributing (hopefully) and caught the massive run up.

Do you have any backups to your claim about people that were FI "before the collapse"?

You're right that adding bonds to the portfolio increases the performance, because bonds outperformed stocks over the past 14 years.  That's not what Buffett recommended though, is it?

Did he recommend one be 100% equities, which is your assumption?  I doubt it.  I don't know that he recommended a certain asset allocation, other than use index funds for the equity portion.

Title: Re: Buffett's Annual Letter
Post by: Poorman on February 26, 2014, 01:46:19 PM

Okay, so in the accumulation phase seems we're good with the market.  Glad we agree there.

Now.. Have you talked with many people that ER'd around that time?  I have read of many of them.  Most are doing just fine.  See Nord's posts, for example.  Go to the E-R.org forums for hundreds of their stories.

Anecdotes, yes, but I'd wager someone savvy enough with finances to ER would have done fine.  Those that didn't would have kept contributing (hopefully) and caught the massive run up.

Do you have any backups to your claim about people that were FI "before the collapse"?

You're right that adding bonds to the portfolio increases the performance, because bonds outperformed stocks over the past 14 years.  That's not what Buffett recommended though, is it?

Did he recommend one be 100% equities, which is your assumption?  I doubt it.  I don't know that he recommended a certain asset allocation, other than use index funds for the equity portion.

To answer your first statement, no we don't agree.  Declining income and long stretches of unemployment aren't conducive to making catch-up payments to your retirement account.

Talking to people that ER'd around that time doesn't tell the whole story because of survivorship bias.  You're more likely to hear about the success stories than the failures.  The fact is that anybody invested in stocks in 2008 took a hit, and if they were retired, probably didn't have the ability to "keep contributing".  Nord receives a military pension which lowers his risk immensely (and he deserves it, BTW), but that's not a situation that most early retirees will be in.

I'm not assuming anything about Buffett.  He recommended owning a cross-section of businesses that are bound to do well.  Bonds are debt, not business ownership.




Title: Re: Buffett's Annual Letter
Post by: arebelspy on February 26, 2014, 02:35:13 PM
I guess I'm missing your point then.

Warren Buffet gives bad advice?
One shouldn't invest in stocks because sometimes the returns are only 3-5%?'
People don't make money in the stock market?
It is impossible to have ER'd in the last decade?

Please explain to me what your point is.

Thanks!  :)
Title: Re: Buffett's Annual Letter
Post by: AdrianC on February 26, 2014, 06:45:35 PM
Confusion is tied to BRK's announcement that they'll buy back their shares at 110% of book value.  (That's roughly $95/share for the "B" shares, about $15-$20 below the usual share price.)  People widely expect that BRK will prop up the price at book value, but that's no guarantee.  Part of me wants to keep selling puts around that $95/share strike so that I'm always ready to scoop up a bargain.

It changed to 120% of book in December 2012.
3rd qtr book was $84.51, so current "buyback" is $101.
We'll find out what year end book was on Saturday. I'm guessing $88, so "buyback" is $105. Trading around $113. Pretty close.
I'm already a bit full with BRK.B, but if it falls to close to 1.2xbook I will buy more.
Title: Re: Buffett's Annual Letter
Post by: grantmeaname on February 26, 2014, 08:40:08 PM
Yeah, so how do you explain why the S&P has more or less tracked the performance of the Dow over each of the periods discussed?  If the author had chosen to use the S&P, the results of the analysis would have been the same.  Same with the Wilshire 5,000 or any other US stock index.  They are all highly correlated.
As I said, he used the Dow to exaggerate his point and his point is an artifact of the ridiculous benchmark he chose. The fact that it's an index doesn't mean it's representative of passive investing.
Title: Re: Buffett's Annual Letter
Post by: beltim on February 26, 2014, 08:59:21 PM
Yeah, so how do you explain why the S&P has more or less tracked the performance of the Dow over each of the periods discussed?  If the author had chosen to use the S&P, the results of the analysis would have been the same.  Same with the Wilshire 5,000 or any other US stock index.  They are all highly correlated.
As I said, he used the Dow to exaggerate his point and his point is an artifact of the ridiculous benchmark he chose. The fact that it's an index doesn't mean it's representative of passive investing.

You're still wrong, and you're ignoring the point. Despite all the problems with calculating the Dow, the correlation between it and broader indices (like the S&P 500) is astonishing. The Dow is not essential to any point when the comparison is the S&P.

Your last sentence is true but irrelevant.
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 27, 2014, 05:14:36 AM
Yeah, so how do you explain why the S&P has more or less tracked the performance of the Dow over each of the periods discussed?  If the author had chosen to use the S&P, the results of the analysis would have been the same.  Same with the Wilshire 5,000 or any other US stock index.  They are all highly correlated.
As I said, he used the Dow to exaggerate his point and his point is an artifact of the ridiculous benchmark he chose. The fact that it's an index doesn't mean it's representative of passive investing.

You're still wrong, and you're ignoring the point. Despite all the problems with calculating the Dow, the correlation between it and broader indices (like the S&P 500) is astonishing. The Dow is not essential to any point when the comparison is the S&P.

Your last sentence is true but irrelevant.

Regardless of all that the article is ridiculous. It's just grasping at straws through what? Pattern recognition of charts? Crystal ball readings? Trying to use an article which amounts to "Here is my prediction of the future" to support an initial assertion that stocks have done poorly over the last 14 years is what is irrelevant. There is currently nothing to support that claim. That article doesn't even make that claim, it makes a prediction from a year and a half ago that has so far proven wrong. Picking one year and trying to say equities don't have a return is too narrow of a criteria to say equities are poor investments or that they don't have returns. If I arbitrarily picked market lows I could say that the market has performed incredibly well. Or I could just link to a bigger study than that terrible fluff piece of an article. http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html That article has many more years than one simple 14 year period.
Title: Re: Buffett's Annual Letter
Post by: grantmeaname on February 27, 2014, 05:24:46 AM
You're still wrong, and you're ignoring the point. Despite all the problems with calculating the Dow, the correlation between it and broader indices (like the S&P 500) is astonishing. The Dow is not essential to any point when the comparison is the S&P.
The correlation between the Dow and the S&P 500 was lowest (http://www.bespokeinvest.com/thinkbig/2013/3/13/dow-and-sp-500-correlation.html) at the beginning of the author's arbitrary time period. He literally went fishing for something to make his numbers look stronger and found he could replace the S&P 500 with the Dow, which overreacts to tech, and then used the top of the tech bubble as his comparison point. That's shitty, misleading journalism. That's "the point".
Title: Re: Buffett's Annual Letter
Post by: aclarridge on February 27, 2014, 08:00:54 AM

Imagine you started investing 14 years ago, reinvesting quarterly and averaging into say a 70/30 stock/bond portfolio. I'm not sure what the return would be but I know it's better than 3.5% annualized. And hell, 3.5% annualized is better than inflation and if that's some kind of worst-case-scenario then that's not bad.

Again, when you pick a point in time right before a big crash, make that your cost basis, and compare returns afterward things aren't going to look as rosy. You have to be extremely unlucky to pick that point in time to invest everything you've got though which is why it's a silly argument to make.


You're right that adding bonds to the portfolio increases the performance, because bonds outperformed stocks over the past 14 years.  That's not what Buffett recommended though, is it?

You're right, he didn't. Ignore that part and read the rest of what I wrote.
Title: Re: Buffett's Annual Letter
Post by: Nords on February 27, 2014, 09:37:31 AM
Confusion is tied to BRK's announcement that they'll buy back their shares at 110% of book value.  (That's roughly $95/share for the "B" shares, about $15-$20 below the usual share price.)  People widely expect that BRK will prop up the price at book value, but that's no guarantee.  Part of me wants to keep selling puts around that $95/share strike so that I'm always ready to scoop up a bargain.

It changed to 120% of book in December 2012.
3rd qtr book was $84.51, so current "buyback" is $101.
We'll find out what year end book was on Saturday. I'm guessing $88, so "buyback" is $105. Trading around $113. Pretty close.
I'm already a bit full with BRK.B, but if it falls to close to 1.2xbook I will buy more.
Do you have a link for that change?  I remember a purchase of a large block of stock back then for close to 120%, but I don't recall that being the new policy. 
Title: Re: Buffett's Annual Letter
Post by: beltim on February 27, 2014, 09:43:22 AM
Regardless of all that the article is ridiculous. It's just grasping at straws through what? Pattern recognition of charts? Crystal ball readings? Trying to use an article which amounts to "Here is my prediction of the future" to support an initial assertion that stocks have done poorly over the last 14 years is what is irrelevant. There is currently nothing to support that claim. That article doesn't even make that claim, it makes a prediction from a year and a half ago that has so far proven wrong. Picking one year and trying to say equities don't have a return is too narrow of a criteria to say equities are poor investments or that they don't have returns. If I arbitrarily picked market lows I could say that the market has performed incredibly well. Or I could just link to a bigger study than that terrible fluff piece of an article. http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html That article has many more years than one simple 14 year period.
Sure.  I never made any claim otherwise, and I agree with you.  I was just saying that despite the Dow's imperfections, it still does its job–providing a measure of the ups or downs of the market.
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 27, 2014, 09:47:01 AM
Regardless of all that the article is ridiculous. It's just grasping at straws through what? Pattern recognition of charts? Crystal ball readings? Trying to use an article which amounts to "Here is my prediction of the future" to support an initial assertion that stocks have done poorly over the last 14 years is what is irrelevant. There is currently nothing to support that claim. That article doesn't even make that claim, it makes a prediction from a year and a half ago that has so far proven wrong. Picking one year and trying to say equities don't have a return is too narrow of a criteria to say equities are poor investments or that they don't have returns. If I arbitrarily picked market lows I could say that the market has performed incredibly well. Or I could just link to a bigger study than that terrible fluff piece of an article. http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html That article has many more years than one simple 14 year period.
Sure.  I never made any claim otherwise, and I agree with you.  I was just saying that despite the Dow's imperfections, it still does its job–providing a measure of the ups or downs of the market.

But more to Grant's point it doesn't when tech stocks go out of wack. Why would I use such a narrow criteria of stocks to measure the performance of a whole market?
Title: Re: Buffett's Annual Letter
Post by: beltim on February 27, 2014, 09:53:09 AM
Regardless of all that the article is ridiculous. It's just grasping at straws through what? Pattern recognition of charts? Crystal ball readings? Trying to use an article which amounts to "Here is my prediction of the future" to support an initial assertion that stocks have done poorly over the last 14 years is what is irrelevant. There is currently nothing to support that claim. That article doesn't even make that claim, it makes a prediction from a year and a half ago that has so far proven wrong. Picking one year and trying to say equities don't have a return is too narrow of a criteria to say equities are poor investments or that they don't have returns. If I arbitrarily picked market lows I could say that the market has performed incredibly well. Or I could just link to a bigger study than that terrible fluff piece of an article. http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html That article has many more years than one simple 14 year period.
Sure.  I never made any claim otherwise, and I agree with you.  I was just saying that despite the Dow's imperfections, it still does its job–providing a measure of the ups or downs of the market.

But more to Grant's point it doesn't when tech stocks go out of wack. Why would I use such a narrow criteria of stocks to measure the performance of a whole market?

I don't know where Grant thinks the author is misusing the Dow - the only chart of the Dow is the one from the Great Depression, when the S&P 500 didn't exist yet.  What am I missing?  Where does the author cherry pick which index he uses in order to further his point?
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 27, 2014, 10:04:38 AM
Regardless of all that the article is ridiculous. It's just grasping at straws through what? Pattern recognition of charts? Crystal ball readings? Trying to use an article which amounts to "Here is my prediction of the future" to support an initial assertion that stocks have done poorly over the last 14 years is what is irrelevant. There is currently nothing to support that claim. That article doesn't even make that claim, it makes a prediction from a year and a half ago that has so far proven wrong. Picking one year and trying to say equities don't have a return is too narrow of a criteria to say equities are poor investments or that they don't have returns. If I arbitrarily picked market lows I could say that the market has performed incredibly well. Or I could just link to a bigger study than that terrible fluff piece of an article. http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html That article has many more years than one simple 14 year period.
Sure.  I never made any claim otherwise, and I agree with you.  I was just saying that despite the Dow's imperfections, it still does its job–providing a measure of the ups or downs of the market.

But more to Grant's point it doesn't when tech stocks go out of wack. Why would I use such a narrow criteria of stocks to measure the performance of a whole market?

I don't know where Grant thinks the author is misusing the Dow - the only chart of the Dow is the one from the Great Depression, when the S&P 500 didn't exist yet.  What am I missing?  Where does the author cherry pick which index he uses in order to further his point?
http://www.mrmoneymustache.com/forum/investor-alley/buffet's-annual-letter/msg229295/#msg229295

It's in the link in the specific message above. The one claiming Dow chart analysis to Japan's ongoing recession.
Title: Re: Buffett's Annual Letter
Post by: beltim on February 27, 2014, 10:13:19 AM
I don't know where Grant thinks the author is misusing the Dow - the only chart of the Dow is the one from the Great Depression, when the S&P 500 didn't exist yet.  What am I missing?  Where does the author cherry pick which index he uses in order to further his point?
http://www.mrmoneymustache.com/forum/investor-alley/buffet's-annual-letter/msg229295/#msg229295

It's in the link in the specific message above. The one claiming Dow chart analysis to Japan's ongoing recession.

Right, but where?  Here are the places in the article where the Dow is mentioned:

1) the title
2) the discussion of the peak in 2000, and what the Dow would be if it followed the trajectory of the Nikkei (note that in the next paragraph, the same discussion is repeated with the S&P)
3) a plot where the Dow in the great depression is compared to the Nikkei in 1989 and the S&P starting in 2000

So which of these is egregious?

Again, I'm saying nothing about the overall quality of the article.  I'm just saying that the correlation between the S&P 500 and the Dow make them quite comparable.
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 27, 2014, 10:38:30 AM
I don't know where Grant thinks the author is misusing the Dow - the only chart of the Dow is the one from the Great Depression, when the S&P 500 didn't exist yet.  What am I missing?  Where does the author cherry pick which index he uses in order to further his point?
http://www.mrmoneymustache.com/forum/investor-alley/buffet's-annual-letter/msg229295/#msg229295

It's in the link in the specific message above. The one claiming Dow chart analysis to Japan's ongoing recession.

Right, but where?  Here are the places in the article where the Dow is mentioned:

1) the title
2) the discussion of the peak in 2000, and what the Dow would be if it followed the trajectory of the Nikkei (note that in the next paragraph, the same discussion is repeated with the S&P)
3) a plot where the Dow in the great depression is compared to the Nikkei in 1989 and the S&P starting in 2000

So which of these is egregious?

Again, I'm saying nothing about the overall quality of the article.  I'm just saying that the correlation between the S&P 500 and the Dow make them quite comparable.

Grant already pointed it out.

You're still wrong, and you're ignoring the point. Despite all the problems with calculating the Dow, the correlation between it and broader indices (like the S&P 500) is astonishing. The Dow is not essential to any point when the comparison is the S&P.
The correlation between the Dow and the S&P 500 was lowest (http://www.bespokeinvest.com/thinkbig/2013/3/13/dow-and-sp-500-correlation.html) at the beginning of the author's arbitrary time period. He literally went fishing for something to make his numbers look stronger and found he could replace the S&P 500 with the Dow, which overreacts to tech, and then used the top of the tech bubble as his comparison point. That's shitty, misleading journalism. That's "the point".

Regardless of that you keep missing Grant's point that it is a shitty misleading article and harping on one specific section of what is broadly a trash article to defend a position.
Title: Re: Buffett's Annual Letter
Post by: beltim on February 27, 2014, 10:45:44 AM
You keep arguing with points I'm not making, and you're not addressing the ones I am.  If you think I'm defending the article as a whole you should reread my posts.
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 27, 2014, 11:20:04 AM
You keep arguing with points I'm not making, and you're not addressing the ones I am.  If you think I'm defending the article as a whole you should reread my posts.

I've reread your posts. If what your posts amount to is nit picking someone else's argument but not actually taking a position in the larger context of the discussion (Buffet's annual letter and his recommendation on the future performance of various markets vs. BRK) then I'm not sure what value we're having in this discussion. Thanks for the conversation though.
Title: Re: Buffett's Annual Letter
Post by: AdrianC on February 27, 2014, 11:42:48 AM
Confusion is tied to BRK's announcement that they'll buy back their shares at 110% of book value.  (That's roughly $95/share for the "B" shares, about $15-$20 below the usual share price.)  People widely expect that BRK will prop up the price at book value, but that's no guarantee.  Part of me wants to keep selling puts around that $95/share strike so that I'm always ready to scoop up a bargain.

It changed to 120% of book in December 2012.
3rd qtr book was $84.51, so current "buyback" is $101.
We'll find out what year end book was on Saturday. I'm guessing $88, so "buyback" is $105. Trading around $113. Pretty close.
I'm already a bit full with BRK.B, but if it falls to close to 1.2xbook I will buy more.
Do you have a link for that change?  I remember a purchase of a large block of stock back then for close to 120%, but I don't recall that being the new policy.

There you go:
http://www.berkshirehathaway.com/news/DEC1212.pdf

By any reasonable measure BRK should be at > 1.5x book, but it just don't get no respect. I'm betting that it will continue to do well after Buffett and Munger. The worst is that it gets broken up and the value of the component parts realized. Not much downside at 1.2x book for a long term owner.
Title: Re: Buffett's Annual Letter
Post by: beltim on February 27, 2014, 11:44:13 AM
Well, this thread has wandered all over the place.  I prefer to think of my posts as focused, rather than nit-picking, because I was largely responding to this:

The Dow is absolutely moronic. IBM influences the Dow more than any other company for no good financial reason and the author abuses that to sell his moronic ideas to unsuspecting readers. Pull that graph up with a real cap-weighted broad index and the "lost 1.4 decades" disappear.

This claim is false, as the "lost 1.4 decades" claim is stronger when using the S&P 500 instead of the Dow (proof: http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1393519135854&chddm=1381796&chls=IntervalBasedLine&cmpto=INDEXSP:.INX&cmptdms=0&q=INDEXDJX:.DJI&ntsp=1&ei=plcOU_CGN-aeiAKlgwE)
Interestingly, the dates there are from the article that you and Grant argue is cherry picking.  But it uses an S&P 500 high.  If you use a Dow high of Jan 14, 2000 you get Dow outperformance of about 15% instead of about 30% (http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1393534800000&chddm=1401344&chls=IntervalBasedLine&cmpto=INDEXSP:.INX&cmptdms=0&q=INDEXDJX:.DJI&ntsp=1&ei=yoMPU4iMCaGfiQKunwE) If you don't cherry pick the starting dates, the Dow and S&P500 track amazingly well.  Look at http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1393534800000&chddm=4039030&chls=IntervalBasedLine&cmpto=INDEXSP:.INX&cmptdms=0&q=INDEXDJX:.DJI&ntsp=1&ei=eYUPU4D8KoqDiwL3wwE and see that the annualized difference over the last 40 years is about 0.04%)

Bringing the conversation back to the topic of future performance of markets: generally I agree that there can be long periods of investment underperformance.  Over the last 14 years, we're in one.  Of course, probably every 14 year period after a market high involves investment underperformance, so I don't think there's anything special or predictive about that. 

I'd argue that a far more important point than the choice of index is the fact that no one's talked about dividends.  I hate using only the price indices for these sorts of comparisons, since a large portion of returns come from dividends which aren't shown in any of the graphs or articles cited in this thread. 
Title: Re: Buffett's Annual Letter
Post by: grantmeaname on February 27, 2014, 12:30:24 PM
I'd argue that a far more important point than the choice of index is the fact that no one's talked about dividends.  I hate using only the price indices for these sorts of comparisons, since a large portion of returns come from dividends which aren't shown in any of the graphs or articles cited in this thread.
Certainly. I think the last two or three "Ehrmagehrd lost decade!!!1!!!one!" threads have largely centered around that line of reasoning.
Title: Re: Buffett's Annual Letter
Post by: dragoncar on February 27, 2014, 03:44:52 PM
I'd argue that a far more important point than the choice of index is the fact that no one's talked about dividends.  I hate using only the price indices for these sorts of comparisons, since a large portion of returns come from dividends which aren't shown in any of the graphs or articles cited in this thread.
Certainly. I think the last two or three "Ehrmagehrd lost decade!!!1!!!one!" threads have largely centered around that line of reasoning.

It was still a lost decade including dividends.  And I don't think we've regained the top if you include inflation.

edit: here's the correct chart... looks like we did hit the inflation adjusted top but that's still a lost decade there

(http://static.cdn-seekingalpha.com/uploads/2013/11/28/saupload_cpisp500.jpg)
http://seekingalpha.com/article/1867501-inflation-and-dividend-adjusted-s-and-p-500-performance
Title: Re: Buffett's Annual Letter
Post by: matchewed on February 27, 2014, 04:31:17 PM
I'd argue that a far more important point than the choice of index is the fact that no one's talked about dividends.  I hate using only the price indices for these sorts of comparisons, since a large portion of returns come from dividends which aren't shown in any of the graphs or articles cited in this thread.
Certainly. I think the last two or three "Ehrmagehrd lost decade!!!1!!!one!" threads have largely centered around that line of reasoning.

It was still a lost decade including dividends.  And I don't think we've regained the top if you include inflation.

edit: here's the correct chart... looks like we did hit the inflation adjusted top but that's still a lost decade there

(http://static.cdn-seekingalpha.com/uploads/2013/11/28/saupload_cpisp500.jpg)
http://seekingalpha.com/article/1867501-inflation-and-dividend-adjusted-s-and-p-500-performance

Would a graph like that have closing price along the Y axis? Or would an invested amount be a better measure for whether the decade was lost? Honest question as I know the dotcom bubble and recession both hit rather hard but I'm trying to make sense of the graph.
Title: Re: Buffett's Annual Letter
Post by: dragoncar on February 27, 2014, 05:21:29 PM

Would a graph like that have closing price along the Y axis? Or would an invested amount be a better measure for whether the decade was lost? Honest question as I know the dotcom bubble and recession both hit rather hard but I'm trying to make sense of the graph.

I think "closing price" is just a misnomer -- it believe the Y axis is invested amount in 1988 2013dollars (since the later earlier values are much higher than nominal)
Title: Re: Buffett's annual letter excerpt
Post by: Nords on February 27, 2014, 07:13:50 PM
Buffett is, what, in his eighties, as is Munger? That means you aren't just betting that he will continue to be a once in a generation investor (a reasonable enough assumption), you're better that all his successor, who will set the strategy for BRKB for most of your and my lifetimes, will also be once in a generation investors. That seems pretty risky to me.
Buffett turned 83 last August, and Munger turned 90 last month.  When Lou Simpson was working for Berkshire, his investments regularly beat the performance of Buffett & Munger.  I doubt that it's "once in a generation" risk.

The hypothesis is that the culture will be maintained by Howard Buffett, Bill Gates, Ajit Jain (in his 60s), the two investment guys (younger than Jain), other board members, and the Berkshire Hathaway portfolio company owners.  In other words, the legacy of Buffett & Munger will give this motley group a reason to continue their value investing habits.  They might not be as good at allocating capital as B&M, and they certainly won't be as articulate or witty, but they could also do a lot better in new areas like tech and real estate.

I'm willing to risk a quarter of my investment portfolio on that hypothesis.

Confusion is tied to BRK's announcement that they'll buy back their shares at 110% of book value.  (That's roughly $95/share for the "B" shares, about $15-$20 below the usual share price.)  People widely expect that BRK will prop up the price at book value, but that's no guarantee.  Part of me wants to keep selling puts around that $95/share strike so that I'm always ready to scoop up a bargain.

It changed to 120% of book in December 2012.
3rd qtr book was $84.51, so current "buyback" is $101.
We'll find out what year end book was on Saturday. I'm guessing $88, so "buyback" is $105. Trading around $113. Pretty close.
I'm already a bit full with BRK.B, but if it falls to close to 1.2xbook I will buy more.
Do you have a link for that change?  I remember a purchase of a large block of stock back then for close to 120%, but I don't recall that being the new policy.

There you go:
http://www.berkshirehathaway.com/news/DEC1212.pdf

By any reasonable measure BRK should be at > 1.5x book, but it just don't get no respect. I'm betting that it will continue to do well after Buffett and Munger. The worst is that it gets broken up and the value of the component parts realized. Not much downside at 1.2x book for a long term owner.
Yeah, that's the one, and rumor was that Ueltschi's heirs were selling his Berkshire shares from his Flight Safety acquisition.  There's speculation that it was 120% because it was a large block of shares in one transaction, and perhaps a little sentiment for Ueltschi's legacy.  It establishes an upper limit for the ratio, but I'm going to keep selling puts with the assumption that significant buying won't begin until 110% of book.  In other words Berskhire is far more likely to bolster the share price at 110% of book than they are at 120%.
Title: Re: Buffett's Annual Letter
Post by: grantmeaname on February 27, 2014, 08:43:47 PM
It was still a lost decade including dividends.  And I don't think we've regained the top if you include inflation.
It was still NOT a lost decade whether or not you include dividends. The fact that the top of the bubble is the same amount as the more rational valuation of ten years later does not mean that the market is in the same place. Look at something more persistent, or even a smoothed measure of stock price, or even stock price anywhere but the top of the mountain, and it's obviously not lost (and again, even this is apparently after adjusting for inflation because heaven forbid we used a graph with numbers not biased to make our point!)
Title: Re: Buffett's Annual Letter
Post by: dragoncar on February 27, 2014, 09:11:07 PM
It was still a lost decade including dividends.  And I don't think we've regained the top if you include inflation.
It was still NOT a lost decade whether or not you include dividends. The fact that the top of the bubble is the same amount as the more rational valuation of ten years later does not mean that the market is in the same place. Look at something more persistent, or even a smoothed measure of stock price, or even stock price anywhere but the top of the mountain, and it's obviously not lost (and again, even this is apparently after adjusting for inflation because heaven forbid we used a graph with numbers not biased to make our point!)

Are you suggesting that it's inappropriate to inflation adjust when talking about investment returns?  Why is it bias to adjust for inflation but not for dividends?

If you look at the graph you can see that a decade was lost even if you didn't invest at the top.  The decade was lost psychologically as well as numerically.

Sure we can "look at something more persisten or even smoothed" (as ephemeral as that statement is) because heaven forbid we used a graph not biased to make your point!

I invite you to post this graph for discussion
Title: Re: Buffett's Annual Letter
Post by: grantmeaname on February 27, 2014, 09:16:56 PM
I'm saying that you have to use the highest point that the market ever achieved in a crazed bubble AND adjust for inflation in order to make the decade look "lost". If you don't do that, it's a relatively low-performing but not exceptional decade, and it's certainly not wasted. For those of us that didn't invest our whole nest egg in a lump sum at the very peak, it wasn't a lost decade at all. It was just fine.
Title: Re: Buffett's Annual Letter
Post by: dragoncar on February 27, 2014, 09:34:55 PM
I'm saying that you have to use the highest point that the market ever achieved in a crazed bubble AND adjust for inflation in order to make the decade look "lost". If you don't do that, it's a relatively low-performing but not exceptional decade, and it's certainly not wasted. For those of us that didn't invest our whole nest egg in a lump sum at the very peak, it wasn't a lost decade at all. It was just fine.

You do not need to adjust for inflation to see the lost decade.  But if you are going to adjust for dividends, inflation should be included too.  It was a very bad decade
Compared to the promises of our parents generation.  Hence "lost"
Title: Re: Buffett's Annual Letter
Post by: Poorman on February 28, 2014, 10:31:26 AM
I'm saying that you have to use the highest point that the market ever achieved in a crazed bubble AND adjust for inflation in order to make the decade look "lost". If you don't do that, it's a relatively low-performing but not exceptional decade, and it's certainly not wasted. For those of us that didn't invest our whole nest egg in a lump sum at the very peak, it wasn't a lost decade at all. It was just fine.

It doesn't matter if you pick the highest point or not.  Start at any point between 1996 and 2000 and you'll see that 12 years later you were still in the same spot -- 0% returns.

The people that were fully invested at the peak and held on through all the turbulence were rewarded with losing about 60% of their portfolios by 2008.  If your long term plan is to index invest your way to ER, you need to make damn sure you can stomach those kinds of losses, or that your asset allocation is conservative enough so that you don't lose your mind and sell near the bottom. 

Ignoring reality won't serve you well as an investor.  What will serve you well is always questioning everything, including the advice from index investors that make it sound like this is a guaranteed thing.
Title: Re: Buffett's Annual Letter
Post by: arebelspy on February 28, 2014, 10:39:04 AM
The people that were fully invested at the peak and held on through all the turbulence were rewarded with losing about 60% of their portfolios by 2008.  If your long term plan is to index invest your way to ER, you need to make damn sure you can stomach those kinds of losses, or that your asset allocation is conservative enough so that you don't lose your mind and sell near the bottom. 

Fully invested, never adding anything along the way, at a cherry picked time (as you say a few words in - "at the peak")... yeah, that's a rough scenario.  No one's denying that.

For the VAST majority though who continued to keep investing all throughout the decade, they did just fine, or better. Therefore for MOST people, it was not a lost decade.  The term lost decade is thus misleading.

If you want to say "lost decade for 'The people that were fully invested at the peak and held on through all the turbulence' " ... okay? 

This advice, intended for someone in the accumulation phase, holds. 

Ignoring reality won't serve you well as an investor. 

Neither will cherry-picking and scare tactics.

What will serve you well is always questioning everything

Agreed.
Title: Re: Buffett's Annual Letter
Post by: Poorman on February 28, 2014, 11:55:15 AM
For the VAST majority though who continued to keep investing all throughout the decade, they did just fine, or better. Therefore for MOST people, it was not a lost decade.  The term lost decade is thus misleading.

If you continued investing in equal amounts at equal intervals, sure your overall balance would have gone up, but your RETURNS would have been 0%.  Hence, it was lost decade for stocks.

Also, it's not cherrypicking because I said starting anytime between 1996-2000 you would have seen 0% returns for the following 12 years.  That gives you a multitude of starting points to choose from.

Helping people see the risks in an investment is not a scare tactic.  Based on this thread and others, I'm convinced that many Mustachians don't think about investing through a risk lense at all.  On another thread, you talked about your "six figure mistake" and how it set you back.  Maybe you shouldn't be so quick to write people off that are trying to bring a different perspective.
Title: Re: Buffett's Annual Letter
Post by: arebelspy on February 28, 2014, 12:09:29 PM
Had I been indexing (and educated around the subject), I wouldn't have made a mistake like that.

Index investing has far less risk than the way most amateur investors invest.
Title: Re: Buffett's Annual Letter
Post by: beltim on February 28, 2014, 12:12:04 PM
If you continued investing in equal amounts at equal intervals, sure your overall balance would have gone up, but your RETURNS would have been 0%.  Hence, it was lost decade for stocks.

This is false.  For an explanation, see examples of dollar-cost averaging where the price chart for a given time is more often below the ending point than above.

Also, it's not cherrypicking because I said starting anytime between 1996-2000 you would have seen 0% returns for the following 12 years.  That gives you a multitude of starting points to choose from.

Right, the first example I chose was June 1, 1999 to June 1, 2011.  The S&P 500 was up 2.25%, not including inflation or dividends.  So I guess it doesn't work for "anytime between 1996-2000."
Title: Re: Buffett's Annual Letter
Post by: swiper on February 28, 2014, 12:13:58 PM
Had I been indexing (and educated around the subject), I wouldn't have made a mistake like that.

Index investing has far less risk than the way most amateur investors invest.

Six figure mistake ... Interested in reading about it. Link?
Title: Re: Buffett's Annual Letter
Post by: Poorman on February 28, 2014, 01:35:03 PM
If you continued investing in equal amounts at equal intervals, sure your overall balance would have gone up, but your RETURNS would have been 0%.  Hence, it was lost decade for stocks.

This is false.  For an explanation, see examples of dollar-cost averaging where the price chart for a given time is more often below the ending point than above.

Also, it's not cherrypicking because I said starting anytime between 1996-2000 you would have seen 0% returns for the following 12 years.  That gives you a multitude of starting points to choose from.

Right, the first example I chose was June 1, 1999 to June 1, 2011.  The S&P 500 was up 2.25%, not including inflation or dividends.  So I guess it doesn't work for "anytime between 1996-2000."

It's not false because dollar-cost averaging works on the theory that you are buying while prices are falling, thereby getting a lower cost basis.  If you look at the chart, the down periods are mirrored by the up periods, so you would have been averaging into rising markets as well.  That means dollar-cost averaging didn't help achieve any returns over and above what the market achieved - 0%. 

We are using an example where returns are adjusted for dividends and inflation... what economists call REAL returns.  I'm not going to question your numbers, but I don't think they are helpful because we live in a world where stocks pay dividends and inflation eats away at our savings.

Using Yahoo Finance, I was able to determine the historical prices of SPY (S&P 500 ETF) adjusted for dividends:

http://finance.yahoo.com/q/hp?s=SPY&a=05&b=1&c=1999&d=05&e=1&f=2011&g=d&z=66&y=2970

June 1st, 1999 = 99.61 (adjusted price)
June 1st, 2011 = 124.40 (adjusted price)

Total Return = 24.9%

Then using the inflation calculator from InflationData.com and plugging in your time period, we can determine that inflation was 35.8% over those 12 years.

That means the real return for those 12 years adjusted for dividends, fees, and inflation was -10.9%.

http://inflationdata.com/Inflation/Inflation_Calculators/Cumulative_Inflation_Calculator.aspx
Title: Re: Buffett's Annual Letter
Post by: arebelspy on February 28, 2014, 01:46:39 PM
I guess I'm missing your point then.

Warren Buffet gives bad advice?
One shouldn't invest in stocks because sometimes the returns are only 3-5%?'
People don't make money in the stock market?
It is impossible to have ER'd in the last decade?

Please explain to me what your point is.

Thanks!  :)

Poorman, you didn't respond to this earlier post.

I'm still not sure what your end point is with all this arguing, or what I'm supposed to take away from this.
Title: Re: Buffett's Annual Letter
Post by: beltim on February 28, 2014, 03:44:35 PM
It's not false because dollar-cost averaging works on the theory that you are buying while prices are falling, thereby getting a lower cost basis.  If you look at the chart, the down periods are mirrored by the up periods, so you would have been averaging into rising markets as well.  That means dollar-cost averaging didn't help achieve any returns over and above what the market achieved - 0%. 

You may be right about real returns after inflation and dividends, but you're still wrong about this.  If you take your Yahoo data and buy shares of SPY on a regular schedule, I don't think there's a single interval you could pick that would give you negative real returns over this time period.
Title: Re: Buffett's Annual Letter
Post by: skyrefuge on February 28, 2014, 04:14:55 PM
we live in a world where stocks pay dividends and inflation eats away at our savings.

http://www.moneychimp.com/features/market_cagr.htm is a calculator that combines total return and inflation in one place. The downside is that the time-granularity is a year.

For the five 12-year periods starting 1996-2000,  the total inflation-adjusted return is

1996-2007: 113%
1997-2008: 12%
1998-2009: 5%
1999-2010: -6%
2000-2011: -21%

So if I'm interpreting your strict claim correctly, that's at least falsified.

If we reduce the timeframe to an actual decade, then the periods staring in 1999, 2000, and 2001 are the three with negative inflation-adjusted total returns.

I've posted before (http://www.mrmoneymustache.com/forum/ask-a-mustachian/how-to-save-50/msg102407/#msg102407) that my personal inflation-adjusted annualized return for June 1998 to June 2012 was 4.8% per year, while the calculator shows that the market returned only 1.2%. Clearly my regular investment schedule gave me a significant boost; I don't know if that was due to the specific shape of the market over that period, or to the variations in my regular contribution amounts (which were unrelated to market values), but that's at least one example where the benefits of dollar cost averaging didn't get "canceled out".

All that said, your general point that people may be underestimating the risk of the stock market (particularly in the current environment) is well-taken.

I think some of the lifetime risk is reduced by the accumulation period. Those who retired in 2000 had the benefit of 10-15 years worth of redonkulous returns during the accumulation phase to balance out the crappy returns for the next decade. The danger is those who planned to have a 15-year accumulation phase, but then saw in 2000 that they hit their goal only in only 9 years and pulled the plug. (that's really how long it would have taken starting in 1991 for someone with a 55% savings rate, which the Shockingly Simple Math says should take 14.5 years). That's part of why I'm still working even though my investments are currently well above 25x my expenses; I'll be much more comfortable after the next market drop.
Title: Re: Buffett's Annual Letter
Post by: dragoncar on February 28, 2014, 04:30:41 PM
It's not false because dollar-cost averaging works on the theory that you are buying while prices are falling, thereby getting a lower cost basis.  If you look at the chart, the down periods are mirrored by the up periods, so you would have been averaging into rising markets as well.  That means dollar-cost averaging didn't help achieve any returns over and above what the market achieved - 0%. 

You may be right about real returns after inflation and dividends, but you're still wrong about this.  If you take your Yahoo data and buy shares of SPY on a regular schedule, I don't think there's a single interval you could pick that would give you negative real returns over this time period.

This completely depends on how much you are regularly investing compared to how much you start with.  But here's an example:

If you had $100000 in January 1999, and invested $387.69 per month plus dividends, you would have an inflation-adjusted $100000 in February 2009.*

Peak to trough would start July 2000, upping the investment to $565.96 per month plus dividends, and end up exactly where you started (inflation adjusted).

Thus, any lower investment would have given you negative total real returns.

*Quick and dirty spreadsheet so no promises.
Title: Re: Buffett's annual letter excerpt
Post by: Nords on March 01, 2014, 12:36:19 PM
Confusion is tied to BRK's announcement that they'll buy back their shares at 110% of book value.  (That's roughly $95/share for the "B" shares, about $15-$20 below the usual share price.)  People widely expect that BRK will prop up the price at book value, but that's no guarantee.  Part of me wants to keep selling puts around that $95/share strike so that I'm always ready to scoop up a bargain.

It changed to 120% of book in December 2012.
3rd qtr book was $84.51, so current "buyback" is $101.
We'll find out what year end book was on Saturday. I'm guessing $88, so "buyback" is $105. Trading around $113. Pretty close.
I'm already a bit full with BRK.B, but if it falls to close to 1.2xbook I will buy more.
Do you have a link for that change?  I remember a purchase of a large block of stock back then for close to 120%, but I don't recall that being the new policy.

There you go:
http://www.berkshirehathaway.com/news/DEC1212.pdf

By any reasonable measure BRK should be at > 1.5x book, but it just don't get no respect. I'm betting that it will continue to do well after Buffett and Munger. The worst is that it gets broken up and the value of the component parts realized. Not much downside at 1.2x book for a long term owner.
Yeah, that's the one, and rumor was that Ueltschi's heirs were selling his Berkshire shares from his Flight Safety acquisition.  There's speculation that it was 120% because it was a large block of shares in one transaction, and perhaps a little sentiment for Ueltschi's legacy.  It establishes an upper limit for the ratio, but I'm going to keep selling puts with the assumption that significant buying won't begin until 110% of book.  In other words Berskhire is far more likely to bolster the share price at 110% of book than they are at 120%.
Let me briefly interrupt this debate with a short on-topic post.

I'm going to have to change my perception of the 110%-120% buyback aggressiveness, based on Buffett's latest shareholder letter:
http://berkshirehathaway.com/letters/2013ltr.pdf
Quote
As I’ve long told you, Berkshire’s intrinsic value far exceeds its book value. Moreover, the difference has widened considerably in recent years. That’s why our 2012 decision to authorize the repurchase of shares at 120% of book value made sense. Purchases at that level benefit continuing shareholders because per-share intrinsic value exceeds that percentage of book value by a meaningful amount. We did not purchase shares during 2013, however, because the stock price did not descend to the 120% level. If it does, we will be aggressive.
Even without share repurchases last year, Berkshire still managed to slightly reduce the float.

Thanks, carry on.
Title: Re: Buffett's Annual Letter
Post by: arebelspy on March 01, 2014, 06:20:02 PM
Joshua Kennon's take on Buffett's letter: www.joshuakennon.com/warren-buffett-hints-berkshire-hathaway-shares-cheap-stockholder-letter/
Title: Re: Buffett's annual letter excerpt
Post by: AdrianC on March 01, 2014, 07:25:02 PM
Let me briefly interrupt this debate with a short on-topic post.

I'm going to have to change my perception of the 110%-120% buyback aggressiveness, based on Buffett's latest shareholder letter:

I saw that too. Now if we could just figure out what he means by "far exceeds" and exceeds "by a meaningful amount".
IV "far exceeds" BV.
IV exceeds BV x 1.2 "by a meaningful amount".

Buying at Friday's price could a good deal for a long term investor.

We are already over 25% of net worth in BRK. I'll buy more if it drifts down a bit. Otherwise I'm keeping the powder dry.
Title: Re: Buffett's Annual Letter
Post by: Nords on March 03, 2014, 08:32:45 PM
Joshua Kennon's take on Buffett's letter: www.joshuakennon.com/warren-buffett-hints-berkshire-hathaway-shares-cheap-stockholder-letter/
Well said.  Sometimes it seems that the only way that Berkshire will ever achieve its intrinsic value is if the company is broken up into its individual portfolio businesses.

In my Berkshire fantasy:
- Both Buffett & Munger announce that they'll step aside to give the new CEO a chance to settle into the saddle while Buffett & Munger are still around to help. 
- The markets will knock BRK shares down 30% in a hysterical over-reaction to the (what they think is "bad") news, exercising all of my BRK puts and giving me another day to buy more shares with spare cash and margin loans.
- The markets will boost BRK shares back up 50% in another hysterical over-reaction to the (what is now seen as "good") news, at which point I'll start selling more BRK calls.
- BRK's new CEO declares a dividend, sending the shares up another 25%, at which point my calls are exercised and I'm back at my original asset allocation.