Today we will pick up part two of Hodgepodge and Potpourri. As you may recall from part one, watching Jeopardy was a family tradition growing up at my house. Nostalgia has led me to borrow these popular Jeopardy categories – Hodgepodge and Potpourri – as an excuse for me to riff on a few unrelated finance topics that have caught my interest recently.
So, let’s jump right into it and pick up where we left off…
Tough as Buff
If I were to poll 100 random people on the street with this question, “Who is the greatest investor of all time?” I assume the most common answer I would get would be, “Warren Buffett.” Why is the Oracle of Omaha the knee-jerk answer for most? One reason is that his actual results (investment returns) make him arguably one of the greatest investors of all time. I am sure his friendly-grandpa-from-the-Midwest demeanor also helps with his popularity and familiarity.
Whether it is sports or business, if we get into a GOAT (Greatest Of All Time) discussion, the results are typically going to be the primary measuring stick. An athlete that has never led his or her team to the championship does not often make the ballot for a GOAT conversation. Some critics and pundits go even further to say that multiple championships are required in order to even be considered in the GOAT discussion.
Each year in Buffett’s annual newsletter to his investors he opens with that very measuring stick, his results vs. the market. From 1965 to 2021 those results were 20.1% annualized for Buffett vs. a 10.5% result for the market. That is 3,641,613% lifetime return for Buffett vs. 30,209% for the market.
Here’s the BUT though, an investor considering investing alongside Mr. Buffett today will not be achieving his past result, but rather they will be signing up for the future results he produces. As the finance industry loves to remind us, “past performance is not indicative of future results.”
Buffett himself claims that it isn’t IQ that makes an incredible investor, but rather one’s temperament. This is not intuitive, and I am sure for most of us, our first reaction is to reject this claim. Yet Warren Buffett is the poster child for this truth. In order to be tough as Buff you have to stick to your convictions, tune out the noise, and essentially not care what others think.
For us mere mortals, we are very sensitive/comparative to the results of our neighbors, we are very self-conscious about our own results we produce, we are extremely fearful of the unknown, and we are just generally shortsighted (especially when it comes to investing). Patience and discipline are not natural to most. The stock market is a reflection of the collective emotions of all participants, reflecting the deepest levels of our fear and greed.
Although Mr. Buffett’s collective body of work has earned him a spot on the investors Mt. Rushmore, it doesn’t mean that he hasn’t run into tough seasons and poor short-term results himself. Every Hall of Famer has a large collection of underwhelming games and moments they wish they could elect for a do-over. In 1999 Warren Buffett’s portfolio trailed the market by over 40%. In a more recent occurrence (2020), Mr. Buffett trailed the market by 16%. These are demoralizing relative losses; these underperformances would break the spirit of most investors. Not Warren though. He’s not playing the same game as the financial media. Buffett, unlike most, has a philosophy and convictions about an approach to investing that is not easily broken; comparisons and embarrassment don’t knock him off of his game.
What about you? What is your temperament? How easily is your endurance challenged? I am sure this statement from Martin Luther King Jr. was never intended to find itself into a personal finance blog, but I think this truth is absolutely applicable, “The true measure of a man is not how he behaves in moments of comfort and convenience but how he stands at times of controversy and challenges.” 2022 has shaken some investors and I’ve seen a lot of folks question their approach, their philosophy, and their convictions about investing. I invite you to regularly reflect on your approach and investment philosophies. These are healthy exercises and they should ultimately be strengthening your confidence not constantly shattering it.
You must be… Tough as Buff! You must be comfortable with being uncomfortable.
Not So Fast, TINA
In classic Hodgepodge fashion, we now make a non sequitur transition.
One of the common mantras you hear around the investing water cooler these days is, “TINA.” An acronym that stands for There Is No Alternative and is a shorthand way of saying that with interest rates this low it is almost forcing investors to increase their allocations to stocks. The environment “feels” like there are no viable investment options beyond publicly traded stocks.
Now, this TINA mantra does place you square between a rock and a hard place. On the first day of Personal Finance 101, you should’ve learned one of the key tenants of investing – diversification. TINA challenges this age-old wisdom as one feels pressed to “risk up” their portfolio to meet the return expectations of their financial plan.
So, I ask you, is there truly no alternative?
There is an alternative and in the vocabulary of finance, we call this category of investments, “alternatives.” How convenient is that? So, yes, there is an alternative and they are alternatives. This broad term – much like hodgepodge and potpourri – is a sort of catch-all category. Alternatives can range from private investments (real estate, equity, and debt) to hedge fund strategies to commodities to derivatives. A wide variety of solutions to match a wide variety of different client objectives.
For me personally, this alternatives category makes up a large allocation of my personal investments. The reason for this is simple. My financial plan has appropriate portions of cash and capacity on lines of credit to sufficiently cover my emergency reserve needs. Everything beyond these monies is earmarked for long-term wealth accumulation. Stocks have been a great resource historically for wealth accumulation and I believe they are still an attractive solution for that very objective BUT I don’t want to put all my monies in publicly traded equities. So, I source alternatives with attractive expected rates of return that are not directly correlated with the publicly traded stock market. This is diversification, something I am not willing to abandon.
What does your portfolio look like? Do you have allocations to alternatives? Do the alternatives you own match the specific objectives you are seeking to achieve?
Again, don’t believe everything you hear on financial television. It is absolutely worthwhile to dialogue and research what alternatives best suit you and your financial plan.
Well… thank you for indulging me and allowing me to present my potpourri of financial curiosities.
My key takeaways from today are (1) Sometimes results will be disappointing and that’s ok, what’s most important is to have faith and conviction about the philosophy and approach you are employing – if not, it will be easy to get rattled and knocked off course (2) I can’t neglect the prudence of diversification. Diversification doesn’t have to mean diluting returns, but rather just diversifying risk and seeking out return sources that are not perfectly correlated with the stock market.
Your homework? Solidify your convictions, write down your philosophy, and make sure your approach has enough foundation to weather the next storm. Second, conduct a thorough review of your portfolio to confirm that you truly are diversified – this is an exercise best executed in a proactive manner vs a reactive approach.
And that should keep you busy for now 😊
I hope you can join me next week, as well, where I will be sharing more of my Thoughts On Money.