Investing For The Far Off Future

Well diversification for the sake of it is useless if they have a high correlation. Picking stocks that have negative correlations is ho you diversify.

Knowledge is needed for both picking decent value stocks and to properly diversify.

 

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It's a good idea to have stocks in more than one industry, but I've seen studies where someone with just 7 stocks has diversified away 85% of the correlation risk. Stock picking just isn't that difficult if you stick to basic value investing concepts of low p/e, low debt etc... Warren Buffett has indicted many times that it isn't that hard, and he is correct.

 

That number is misleading. You would be picking some VERY weird stocks, as 7 stocks to eliminate 85% correlation is about the limit, and you would be forced into paying for some pretty horrible stocks in order to lower the correlation. Now, at around 25 stocks you can lower it well in excess of 90% and have nearly unlimited freedom to pick better stocks, (assuming a couple of rules). On the flip side, a person could pick 25 stocks, and if they did not know how to eliminate correlation still be very vulnerable to high correlation. Again, a modicum of knowledge can help greatly.

Remember, Buffett has been around stocks for 60 years, to him its his daily world. Of course its easy for him, and easy for him to educate about it, yet so so many people wimply are unwilling to learn the principle, and get into trouble.

 

What Buffett does, and what Buffett says, are two totally different things.

 

I find Buffett pretty honest, he just does it first, then explains why. I don't blame him for not advertising to the world he is accumulating a position. Why should he drive up his costs?

Now Soros and his ilk, those kinds of guys will talk up silver while they are selling it at the very same time. Most professional investors I never listen to since way too many of them use the media to benefit themselves.

 

Buffet has lost a huge amount of money over the last 5-6 years. It's an indication that his tactics of the past don't work with the realities of the market today. If it wasn't for his political ties that grant him special deals the common person can't get, his losses would be even greater.

There was a very good automatic graphic on zerohedge the other day that shows how the stock market has been hugely changed in the the last 5-6 years by HFT trading, very low volume and the departure of the retail investor. It's fascinating to watch.

 

you can buy a nice home in the desert of california for under $60,000. all you need is your $5,000 down and 2 years of income.(good credit as well). your payments would be around $300 and you can rent it out for around $700 a month. thats $400 a month in income plus your equity should grow.

http://www.homepath.com/search.html...id=&bhi=&z=93505&y=10&x=36&pa=&st=CA&bdi=&ci=

same scenario all over the US


may not be the best scenario for the OP. but now is the time to be a landlord. you can always use a property management company to handle the property if you don't want to deal with it.

 

I don't agree. Consider if you purchased XOM, PG, WFC, INTC, PEP, JNJ, and MO. That would provide tremendous diversification, safety, dividends, growth and diversification without buying anything weird or horrible. [These are not recommendations to buy, only for illustration]. I also don't think correlation is a goal worth pursuing unless you are a pension fund. Value is the goal worth pursuing. If you want 100% correlation, buy and index. If you want to do better, do a little homework -- but it just isn't that difficult. Ben Graham pointed this out 80 years ago and it is still good advice. Academics and investment salemen have a vested interest in making the simple seem complex because complexity is the source of their income. But the average person can and should avoid imitating them - all my opinion of course.

 

I agree. The Buffett of the 1960s and 1970s had a lot more to teach people than the Buffett of today. At the same time, it is difficult to ignore his advice because of the success he had when he was younger with less money to invest. Now he has basically become an institution and not an individual investor. You can read the Berkshire Hathaway shareholder letters from the 1970s on the company website. It is very worthwhile reading, and back then he actually did what he said to do.

 

As usually, it is worthwhile to check out fatima's claims. In fact, Berkshire Hathaway, Buffett's primary investment, is up somewhat over the past 5 years.

http://finance.yahoo.com/q/bc?s=BRK-A&t=5y&l=on&z=l&q=l&c=

It's up a lot more over longer periods of time.

http://finance.yahoo.com/q/bc?s=BRK-A&t=my&l=on&z=l&q=l&c=

But I will grant you that his investment holdings have grown so huge through his successful business and investment operations that it is now difficult for him to outperform the market. We should all have such problems.

 

Those charts show him losing $30,000/share since '08 and he basically mimics the general S&P 500 these days. Notice the swing from 150,000 to 70,000 in a few months. This isn't the hallmark of a great investor, it's an index fund. (and not a very good one at that)

 

If you want to point out that the price of BRK is lower than the all-time high, then I agree. Very few real value investors would have purchased BRK when the price went parabolic in 2007. And if you want to argue that Buffett's investing success has been so great that his company is now too large to do much better than the S&P, I will again agree. But for anyone who has been in the stock for 5 years or more, the returns run from matching the market return to spectacular gains in wealth.

Anyone with half a brain would realize that it pays to study the actions and listen to the advice of someone who made so much money in the markets that they really can't beat the averages anymore because they have become the averages.

 

I agree with the 1/2 a brain comment. Some would also say that even someone with this limited brainpower should consider the context in which a comment was made. I disagree with the returns on the general market. It's hasn't gone anywhere since 2000 beyond booms and busts created by money printing and 0% interest rates. For investors this is a disaster because they could have done better just by holding insured savings vehicles.

 

(dup)

 

Anyone who reads and follows Graham's book would have had no problem taking advantage of the market swings of the past decade even without a lot of training. Successful investing is more about mindset than advanced education. And even if someone didn't their return from dividends probably matched the savings account interest rate. The OP asked about investing for the far off future, and for that purpose I would prefer buying stocks at the same price as a dozen years ago to gold at 6X the price of a dozen years ago. Everyone has to decide this for themselves and live with the consequences.

 

Yeah, in certain places, RE is probably a good buy now. I even heard Marc Faber recently on Bloomberg TV talking about what a good value Arizona RE is at current prices. And you can get a positive cash flow, if you do it right. Even in my expensive area, metro-Boston, a 2 or 3 family property could be a good buy now. But, you have to be young enough, & have enough energy, to deal with it. I never had a property management company deal with my rental properties, but if the tenant stops paying, or something expensive breaks, still, the landlord has to deal with it. I do like the idea of buying into asset classes that are cheap, & where you have income, & not buying into the hottest investment that's already gone up 500-600%..... Too many people now have the idea that there's only "one sure way" to make money now (usually PM), IMO.....

 

Yeah, in certain places, RE is probably a good buy now. I even heard Marc Faber recently on Bloomberg TV talking about what a good value Arizona RE is at current prices. And you can get a positive cash flow, if you do it right. Even in my expensive area, metro-Boston, a 2 or 3 family property could be a decent buy now.


But, you have to be young enough, & have enough energy, to deal with it. I never had a property management company deal with my rental properties, but if the tenant stops paying, or something expensive breaks, still, the landlord has to deal with it. I do like the idea of buying into asset classes that are cheap, & where you have income, & not buying into the hottest investment that's already gone up 500-600%.....

 

The reason gold looks so overbought in comparison to stocks is because of the downtrend in the DOW/gold ratio I've mentioned before (credit to Mike Maloney) which hasn't shown any signs of reversing as of yet. If the behavior of this ratio over the last century is any indication we may see gold and the DOW at the same price before the trend reverses. A dozen years ago the DOW/gold ratio was the highest it has ever been so I wouldn't equate that to equilibrium. I wouldn't equate a 1:1 ratio to equilibrium either but the rubberband effect is noticeable.

 

Sorry sir, but I would emphatically warn you to not put any weight in this comparison. Gold is a store of value, and a proxy for the labor required to get it out of the ground. Stock markets are prospective valuations of company profits. The two things have very, very little in common, (even the pricing mix of any index is pure coincidence), and would hate you making any investment decision on these accidental relationships drawn between the two things.

Humans like to try to tease apart hidden relationships in numbers. Its how our brain is wired. Problem is, I could put together a relationship paradigm tying together price of silver as it related to the average temperature at noon in Bali and this season's lemon crop in CA. Sometimes you have to stop yourself and ask WHY would these things have any relationship? If you cannot concretely answer that question, then odds are its just number BS than thousands of people put together every day trying to get someone to pay them money for their "insights".

Chris

 

I agree that gold is still in an uptrend and I have no problem owing it, but I don't put much faith in the popular ratios of gold to silver or gold to DJIA. A lot of people have made money in gold this century, particularly the early investors. But I see signs of over-confidence based on the bull market and reasoning for it to continue "forever" that sound a lot like some of the reasoning people came up with during the tech stock bubble of the 1990s. I don't think gold is in a bubble [yet] but people are starting to get the gold fever.