Becoming Warren Buffet 2017

If you could unconsciously go back to when you were in the 30-40 unit holder range strategy and that does require work on several levels,then add compounding company splits reinvestment plans everything ,compared to the investment set-up's you now employ what would be the difference in the end result ..

 

Interesting. I thought I heard his leverage was lower than that on average (around 1.3:1), appears I need to read more

 

I wish everyone would. There is a bit of a misnomer around here that Buffett didn't leverage. Of course this is nonsense.

As the paper is at pains to point out, yes, Warren Buffett is indeed an excellent stock picker. But it is the combination of this, the leverage of being able to invest that insurance float and then the sheer length of time that he has been doing this which are the three things that add up to his total success.
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He's been using his incredible stock picking and investment skills on the much larger amount of money within the company and thus providing significant leverage to his own initial investment.
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The Academic Paper That Explains Warren Buffett's Investment Success

I don't really understand the anti-leverage comments such as:

Question for @Il Falco, how did leverage affect Buffett's behaviour as an investor? Do you think he would have been as wildly successful without leverage?

 

nah, Austing is right. the professionals need the dummies around to sell stuff to at inflated prices and buy at cheap prices.

 

Market Efficiency and the Impact of Passive Indexing

 

Looks like there could be opportunities for actively managed funds to outperform the market.

 

I'll PM you when I get a chance mate.

 

I was basing this on research I'd seen by Ben Carlson? and another author from memory. Don't have time to find the articles at the moment given we have visitors.

That is, the best traders have been able to profit from trading against the amateurs. As the amateurs give up to follow the passive ETF path that leaves the best competing against the best. So much harder to win.

Happy to be proven wrong as it doesn't really matter that much to me. Like all research there's always going to be arguments for and against.

 

Check post 21 in this thread where I mentioned Buffett's use of float

I also made this comment in another thread which you liked ;

I am not anti-leverage at all. What I am against is favour of a given asset class over another simply because it allows more leverage to be taken. The "I like property because I can use the most leverage" line which is common here. @truong has done some great modelling on this which shows you what can be done with unleveraged stock portfolio over time.......without the downside risk of leverage.

To your point about how leverage affected Buffett's behaviour? not much, the bloke is basically autistic He has absolutely been able to juice his returns with leverage..........but he hasn't chosen an asset class based on ability to lever up. Hope this makes things clear?

 

@austing talking about investing (longer term) as opposed to trading. Active investors play an important role in price discovery, take them out and I believe opportunities present. Jason Zweig has something on this Investing in Stocks Against the Indexing Goliath I've also seen Marks in an interview - he has come to the same conclusion.

 

Makes sense. Thanks for taking the time to respond. I agree that the "I like property because I can use the most leverage" line is not correct and I correct it when I can.

You just confused me when you said:

and

Just because if I saved my pennies before I invest then I will be in a very mediocre position by the time I want to retire.

I still don't agree with no leverage for the young. A person taking out a modest loan at 20 to invest in a solid share portfolio (be that direct shares, ETFs or LICs) will always outperform someone who saves before investing. That's something that @truong didn't model: unleveraged share investing vs leveraged share investing.

That doesn't mean that people should max out their borrowing capacity to go all in on speculative shares. Leverage only works when investing sensibly.

 

That's absolutely not true. What happens when the market tanks and this bloke panics, particularly due to the debt level. What happens when he loses his job and cant service the debt. What happens when stocks go nowhere for 5 years and he packs it in?

He is worse off for having used leverage. This is my point to understand the effect that leverage can have for an investor. It hurts losing your money, it hurts more losing money you haven't got!

The problem is that there is no downside risk modelling for leverage, there are the survivors, and then there are the others!!

Of course in the long run risk assets will outperform the risk free rate of return (cash). However, for many people, carrying the debt is a psychological burden which may cause them to act unwisely at the wrong time. Something to consider with highly liquid investments! (Note, I am not saying its inappropriate for you!)

 

As I said

Panic selling is not sensible.
Buying a share portfolio that cant service the debt is not sensible.
Packing it in because shares go nowhere for 5 years is not sensible.

You are reading too much into my comments. Remember I said: A person taking out a modest loan... not leveraging up to the eyeballs, swimming in debt and scared to sleep at night in case the share market tanks. Our sober investor, taking modest leverage and making sensible investments will outperform his mate who saves every cent and only then invests.

It depends on the mindset of the investor. Property prices go up and down, share prices go up or down. You only make money when you sell. You only lose money if you sell. I have seen my assets in both classes go up and down. It means nothing to me. I only care if I take a profit (which I have done) or crystallize a loss (which I have never done).

If people feel burdened by debt or panic when share prices move, then they definitely should not leverage. Leverage to invest in shares is definitely a game for the more sober minded. People who don't panic if a share, ETF or LIC falls in value can benefit from leverage.

Imagine if I borrowed to buy a house and then panicked when the price dropped and sold. I would be broke! And yet every property I have ever owned has dropped in value... but I have always sold at a profit.

I apply the same mindset to share investing. If I borrowed to buy VAS and then VAS went down, why would I sell? That kind of thinking is sheer madness to me. I think its because I don't evaluate my self worth by my net worth. For example, at this time I have no clue what my net worth is, or my net debt for that matter. These things have no interest to me. I invest for income, so I can tell you to the dollar how much each of my IPs is rented out for.

Back to VAS. If I bought a bundle of VAS returning $X income, I would care less if they dropped 50% in value. I would see it as an opportunity to buy more, and benefit from increased income at a lower price. However, if the $X income dropped 50% over the long term (not just a one off), it would affect me. That's why diversification is important to me.

I take your point about leverage. If people borrow, buy and panic sell when prices drop, leverage will make them poor. Or more correctly, their irrational behaviour will make them poor.

I still argue that a rational investor will benefit from leverage though.

 

@Perthguy ; agreed.

 

I guess it depends on the type of leverage too. We have just been talking "leverage", which is a bit misleading when it comes to buying listed securities. Buying to borrow shares would typically be a margin loan. I can imagine it would be extremely stressful for an investor to take out a margin loan to buy a share that suddenly drops in value. It's not only psychologically difficult but financially as well, when their lender calls in the margin.

I probably mentioned it earlier on but I will be borrowing against a rented out, unencumbered IP. This is just standard resi loan and the rent will more than cover the interest payments. I will start by using the borrowed funds to build a portfolio that will returned fully franked dividends.

-Because the loan can't be subject to a margin call, I don't have that psychological stress.
-Because the loan interest payments are already covered by rent, I don't need to stress if my dividends go down.
-Because the loan is fully secured, I am relatively unaffected by share price movements.
-If my rental income disappeared and my dividends reverted to zero, I could easily make the interest payments using my salary until the markets recover.

In effect, the loan is twice covered, by the value of the property and by the value of the shares.
The interest payments are triple covered: first by rent, then by dividends, then by my salary. Really, even if the property market crashed and the share market crashed at the same time, I could still make my interest payments until the market recovered.

I would feel comfortable leveraging up using this strategy. I would not feel comfortable with any kind of margin loan. So I guess, there's "leverage" and there's "leverage" and not all leverage is the same.

 

Buffett's annual letter is due out this weekend

Expect more about passive investing

 

His class A shares are 250K each. Any idea what sort of return you get? I'd research it but it's Friday night and I am not quite up to it.

Just also remember that the ol' Buff is getting on, he ain't no spring chicken, so what happens when he bundies off? Will his empire take a hit?

 

Very good summary @Perthguy !!!

 

Run the chart, BRK pays no dividends so the chart tells the story. From here, I'd expect BRK to compound book value by 8-10% per annum long term.
You'll do better than that buying at low price to book, and worse buying at high PB. Early 2016 presented a good opportunity in the 1.25x range vs current 1.55x.

Re post Buffett ; a big subject which there are books on!, Short term buying opportunity imho. The business has a lot of value that will be realized one way or another. Wazza has put a lot of thought in to all of this, as you would imagine.

 

That's amazing , no dividends, only a growth stock.

WB is an incredible individual.