The Best Investment Advice Nobody Will Give You

Even if you’re an investing novice, it’s likely you’ve heard of Warren Buffett. And for good reason: Warren Buffett is currently the third-richest person in the world with a reported net worth of $84 billion. Unlike the two richest men[i], Buffett created his wealth mostly by investing – as in the actual act of buying and selling companies – rather than creating a product or service.

Since taking the reins at Berkshire Hathaway, the Oracle of Omaha has been able to nearly double the S&P 500’s annual return, growing Berkshire stock at a 21.1% annualized clip versus the S&P 500’s 10.3% increase. Put differently, if you were able to invest $1,000 in Berkshire Hathaway when Buffett was named as CEO, your initial investment would be worth approximately $21 million versus $161,000 from a $1000 investment in the S&P 500.

Here’s the rub: It’s virtually a certainty that you’re no Warren Buffett

Don’t take this personally. I’m no Warren Buffett and it’s unlikely your financial advisor or uncle that traffics in gold bars and government conspiracies is either. At the risk of angering the Oracle of Omaha[ii], I’d say it’s unlikely Warren Buffett would be Warren Buffett if he started his career today.[iii]

I’d rather not get bogged down into the philosophical debate about whether it’s possible to beat the market or not, and for how long, but my point is why should you risk your future on the premise you’re the next Warren Buffett.

Here’s the best advice nobody[iv] in the financial industry will tell you: Your savings rate is more important to your investing success than your rate of return.

Sally and her friends

To drive home this point, meet Saver Sally. Sally is a consistent investor and accepts the market’s return instead of attempting to time or beat the market. After 20 years of stashing away $1000 per month, Sally has an admirable nest egg of approximately $760,000.

Sally’s a gregarious person, having six friends who also contribute to their retirement, although at differing levels, timeframes, and investing returns than Sally. The table below compares their respective strategies to Sally with color shadings of green and red to signify a better or worse result than Sally.

CaptureSaverSally.PNG

A few things to note:

·         Bruce has the lowest contributions to his retirement and has the lowest nest egg.

·         Roger’s value is approximately half of Sallie’s, even though he doubled her return due to his short investment period.

·         Larry was indistinguishable from Sallie save for his shorter investment period. His ten-year delay was costly as he has only 25% of Sallie’s value saved for retirement.

·         Susan is an interesting case[v]. It appears she was too conservative with her investments, but has more retirement funds than Bruce, Roger, or Larry due to the fact she contributed more money over a longer investment horizon.

·         Although Stephen cannot contribute as much per month as Sallie and her other friends (save for Bruce), due to his longer contribution timeline he has the third-largest retirement nest egg.

·         Wall Street Wally – I hate that guy![vi] However, it’s possible Wally’s savings rate and time invested afforded him the ability to eventually invest in riskier asset classes like private equity.[vii]

Too often investors are looking to be the next Warren Buffett (without the prerequisite investing intelligence) rather than the next Saver Sally. It may not be as exciting, but investing more money has the benefit of being a less-risky approach to increase your net worth.

 

[i] No. 1: Jeff Bezos; No. 2: Bill Gates

[ii] Buffett has often discussed the role luck has played a role in his career.

[iii] The last decade Buffett has outperformed the S&P 500 by 1.4 percentage points, which is still impressive but much lower than the 10.8 overall percentage-point differential.

[iv] Ok, I took a few liberties here with the absolute reference. Very few.

[v] Yes, I know this slightly conflicts with the “advice nobody ever gives you” bit above. At the extremes, return rates will matter – a negative 100% return, for example, would negate any differences in contribution levels.

[vi] Wall Street Warren went on to serve a 10-year sentence, after being convicted for insider trading.

[vii] Nah, definitely insider trading.

Jamal Carnette