Warren Buffett's advice for his wife

Sam_J12

I see this quote from WB a lot, and usually people use it as support for a passive investment strategy. The reality is that Buffet spent much of his life writing about how individual investors - amateur or professional - can beat the market with value investing. In fact, close to everything he wrote had that theme. In one of his shareholder letters he talks about a prominent academic who was amongst the first to champion passive investing (his name escapes me for the moment) in fact did not pursue a pssive investment strategy himself and held large numbers of Berkshire Hathaway shares, which made him very rich.

The reason Buffet gives for recommending that particular strategy is due to his loathing for most finance professionals, who he believes suck massive money from the system by inventing well paid roles for themselves and pretending these are essential to investing success. Passive investing is a simple way around this issue, which is why he recommends it for his wife after his death. It is not because he believes the market cannot be beaten, and he has written extensively on how it can be beaten and he is living evidence of it.

As for the strategy of 90/10 S&P500/bonds his reasoning is fairly simple - his wife(s?) can live on the bond income so does not need to sell shares at market lows, and Buffet has a huge amount of faith in the US economy to outperform the rest of the world and has shown itself to be hugely resilient over long lengths of time which is why he favours US stocks over any other. It is a bit of a bet, but one with a large amount of history supporting it.

Also, Buffets intends to give away virtually all of his wealth after his death, so I believe his wife will not be a billionaire.

DominicH

masonic wrote: »

Isn't that just because the US market is so much bigger?

No. Home bias is how big a proportion you invest in your home market compared to how much investors as a whole do. If you put 20% in the UK compared to the 10% that global investors as a whole do, you are investing twice as much in UK companies as they do.
As for "ah, but the FTSE is full of multinationals", well, so is the S&P.

masonic

DominicH wrote: »

No. Home bias is how big a proportion you invest in your home market compared to how much investors as a whole do. If you put 20% in the UK compared to the 10% that global investors as a whole do, you are investing twice as much in UK companies as they do.
As for "ah, but the FTSE is full of multinationals", well, so is the S&P.

If, as you say, "you put 20% in the UK compared to the 10% that global investors as a whole do, you are investing twice as much in UK companies as they do", then what does it look like when a US investor puts twice as much in US companies as global investors as a whole? What percentage is twice as much as 60% in this context?

Edit: Follow-up questions, which portfolio looks most balanced? Which in your opinion has the most home bias?

A) UK investor: USA: 50%, UK: 20% Europe: 20%, Pacific: 10% (Home bias factor: 2.7, Absolute: 12.5%)
US investor: USA 100% (Home bias factor: 1.69, Absolute: 40%)
C) UK investor: UK: 40%, USA: 30%, Europe: 20%, Pacific: 10% (Home bias factor: 5.4, Absolute: 32.5%)

For me portfolio A is most balanced and C has the most home bias, but B is totally unbalanced, even though it has the lowest home bias factor - being only invested in one market.

(NB: based on MSCI world index country weightings as of 29 Jan 2016)

In both countries, there will surely be a large number of people who are 100% UK and 100% US respectively, but those people in the UK have a much greater effect on the average UK home bias because in absolute and proportional terms, 100% UK is treated as being much more home biased than 100% US, but that's just a quirk of the calculation, which was my point above.

TheTracker

masonic wrote: »

If, as you say, "you put 20% in the UK compared to the 10% that global investors as a whole do, you are investing twice as much in UK companies as they do", then how do you put twice as much in US companies as global investors as a whole? What percentage is twice as much as 60%?

120%. 80% in a US tracker, 20% in a doubler.

Malthusian

It is not because he believes the market cannot be beaten, and he has written extensively on how it can be beaten and he is living evidence of it.

No he isn't. There are thousands of wannabe Warren Buffets who follow his "value investing" principles with varying degrees of success. But there is still only one Warren Buffet.

jjgold

Sam_J12 wrote: »

I see this quote from WB a lot, and usually people use it as support for a passive investment strategy. The reality is that Buffet spent much of his life writing about how individual investors - amateur or professional - can beat the market with value investing. In fact, close to everything he wrote had that theme. In one of his shareholder letters he talks about a prominent academic who was amongst the first to champion passive investing (his name escapes me for the moment) in fact did not pursue a pssive investment strategy himself and held large numbers of Berkshire Hathaway shares, which made him very rich.

The reason Buffet gives for recommending that particular strategy is due to his loathing for most finance professionals, who he believes suck massive money from the system by inventing well paid roles for themselves and pretending these are essential to investing success. Passive investing is a simple way around this issue, which is why he recommends it for his wife after his death. It is not because he believes the market cannot be beaten, and he has written extensively on how it can be beaten and he is living evidence of it.

As for the strategy of 90/10 S&P500/bonds his reasoning is fairly simple - his wife(s?) can live on the bond income so does not need to sell shares at market lows, and Buffet has a huge amount of faith in the US economy to outperform the rest of the world and has shown itself to be hugely resilient over long lengths of time which is why he favours US stocks over any other. It is a bit of a bet, but one with a large amount of history supporting it.

Also, Buffets intends to give away virtually all of his wealth after his death, so I believe his wife will not be a billionaire.

good post SAM
you're the only person so far in this thread to understand what he meant :T
everyone else needs to read SAMs post

atlanticspan

Warren Buffett's wife could live very comfortably of a 10% bond holding,I couldn't.

TheTracker

Sam_J12 wrote: »

I see this quote from WB a lot, and usually people use it as support for a passive investment strategy. The reality is that Buffet spent much of his life writing about how individual investors - amateur or professional - can beat the market with value investing. In fact, close to everything he wrote had that theme. In one of his shareholder letters he talks about a prominent academic who was amongst the first to champion passive investing (his name escapes me for the moment) in fact did not pursue a pssive investment strategy himself and held large numbers of Berkshire Hathaway shares, which made him very rich.

Warren Buffet is on record as a passive investing fan, and passive investors are often Warren Buffet fans. Buffet and Bogle are good friends.

It's easy to dismiss this advice to a rich wife on the basis of net worth and relationship, but in Bogle's book "The Little Book of Common Sense Investing" Buffett says "A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.". He doesn't believe it is just for billionaire heirs.

atlanticspan

TheTracker wrote: »

Warren Buffet is on record as a passive investing fan, and passive investors are often Warren Buffet fans. Buffet and Bogle are good friends.

It's easy to dismiss this advice to a rich wife on the basis of net worth and relationship, but in Bogle's book "The Little Book of Common Sense Investing" Buffett says "A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.". He doesn't believe it is just for billionaire heirs.

John Bogle's 'Little Book' is fantastic. I tend to abide by his advice of using low cost index funds and roughly owning my age in bonds. It has served me very well over the years. I rebalance once a year and that's it. Since the advent of Vanguard LifeStrategy Funds, it has been made even easier.

Gadfium

jjgold wrote: »

good post SAM
you're the only person so far in this thread to understand what he meant :T
everyone else needs to read SAMs post

If Buffets advice was easy to follow, then there would be millions of mini-Buffets. The fact that he is unique means that his path is not easy to follow or emulate. It's a bit like Reinhold Messner talking about climbing >8000 metre peaks without the use of oxygen- yes it's possible and it's probably the purest way to ascend a mountain. How people in the world have repeated it since, though?

Like investing, many of us aspire to be like the greats. We read their books and dwell vicariously on their achievements. But most of us are sensible to realise that a Sunday afternoon scramble in the Lake District will be our limits.