MMM (My Favorite Munger)
Let’s start off with some Charlie Munger quotes. The last line of the second one is just great:
Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind. … When you’re young it’s easy to drift into loyalties and when you announce that you’re a loyal member and you start shouting the orthodox ideology out, what you’re doing is pounding it in, pounding it in, and you’re gradually ruining your mind.
Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome. Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years – and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know. He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know. … Knowing what you don’t know is more useful than being brilliant.
Watch out for Drunk Uncle Larry on Thanksgiving
Do you know people who are completely locked into their ways and have closed their minds to any dissenting opinion? They know that they’re right and no one on earth can convince them otherwise.
We all know them. These are the family members who seek to engage you in battle at holiday dinners. Dare to say anything Uncle Larry disagrees with and you’ll get an earful of why the country is going to hell. Logic and thought need not apply because the talk-radio dude (aka echo chamber) says otherwise. Seven beers only exacerbates Uncle’s insanity.
Having a closed mind is a silly and detrimental way to live. Not thinking – not using your brain to consider and apply new information – holds you back. If anything is true, it’s that everything is changing all the time. What is true today may not be true tomorrow. Smart ones think and adapt, knowing that life is a journey of learning.
I hope that I always have an open mind and never get stuck in my ways. Even drunk old Uncle Larry may have a couple valid points deep down. Well, maybe not, but you know what I mean.
Learning
I’ve had some pretty great success as stock investor. Four stocks that I own are 10 baggers: Apple, Chipotle, Google and Tesla. On very rare occasions, I’ve had some good insights that led me to buy these companies. However, much of my success is also due to sheer luck and being too stubborn to sell.
Even more amazing is how much I don’t know. One could say that I’ve succeeded in spite of myself. Before starting this blog, I barely knew what an index fund was. I had no idea who Jack Bogle (founder of Vanguard) was either. Now, almost all new money goes into index funds run by Mr. Bogle’s little company.
Last week in my performance update, I wrote about how I’m reallocating my portfolio:
I enjoy my home country of the United States, but my portfolio allocation is unhealthy. 84% is just too much to have in the USA egg basket.
Readers had a lot to say about this. A lot of readers happen to think that America is where it’s at:
Argument 1: Buy US Only (Merica!)
I love it when a reader challenges my thoughts. Dividend Growth Investor (DGI) has challenged me at least a couple times. In last week’s performance update, DGI said this to say:
As far as international stocks are concerned – are you aware that roughly 40% – 50% of revenues on S&P 500 companies is derived from international operations?
When you own S&P 500, you have exposure to the international economy. The whole idea of home bias is BS for US investors – our stock market is much more diverse than most others. In Canada for example, you have heavy exposure to commodities and financials – this is not the case for US.
If you’d like to learn more about what DGI thinks, check out his post: http://www.dividendgrowthinvestor.com/2014/10/is-international-exposure-overrated.html
Jason from Reaching our Balance had something similar to say:
I am overweight on my US stock position, but at some level we have to remember that almost 30% of earnings of these corporations are outside the U.S. so buying solid U.S. companies where their top-line growth abroad isn’t necessarily all that bad.
A while ago, my friend Denver E also reminded me that Jim Collins’ had written a post on the subject. Mr. Collins is in the same camp:
With VTSAX you own 3277 companies, virtually every publicly traded company in the USA. More to the point, the largest of these are all international businesses, many of which generate 50% or more of their sales and profits overseas.
Finally, none other than Warren Buffett and Jack Bogle are also big proponents of investing only in US based companies. Read about their views here and here respectively.
Argument 2: Diversify with Foreign Holdings
I also sought out someone who does believe in diversifying overseas. I know that my friend Bryan over at Income Surfer invests internationally. Here are a couple of his counterpoints:
Don’t call me a pessimist, but we’ve had an era….a century really….of American exceptionalism. The 19th century belonged to Britian. The 20th century to the US. Who will the 21st century belong to?? It could well be America, but wealth preservation is about diversification and wise investing.
Look at the difference in PE ratios, or price to book ratios, for different markets. There is often a very wide spread…. although less so at the moment.
As Bryan said, the US markets are selling at a premium compared to the rest of the world. Perhaps this is deserved, perhaps not. I’m not smart enough to answer that.
In yesterday’s post, Freedom 40 from Freedom 40 Plan said this:
The US will continue to be a juggernaut, but I think a big part of economic growth will come down to simple demographics. Europe and the US have aging populaces and low population growth. Developing economies have huge populations who are just now earning money and of course want to buy everything from kitchenware to cars. This force will continue and I think be a huge unstoppable driver of economic growth for the next 50 years. Focusing solely on the US will mean less volatility, but less chance at exponential rewards.
Finally – emerging market stocks are getting hammered right now, in large part due to China’s slow down. But over the long run, the growth will continue. Can you say buying opportunity!
Thanks Freedom 40; I think there is definitely something to this.
And the Verdict is…
Both sides make compelling arguments. Over the long term, I’m unconvinced that my allocation will make much difference in returns as long as the order of the world remains the same. As DGI first pointed out, companies based in America do a lot of business overseas. On the flip-side, overseas companies like BMW and and Hyundai sell loads of cars here. If the United States has a depression, companies worldwide will suffer.
However, the incredible rise of China and others may start to swing the pendulum away from the United States in the decades to come. China has come out of nowhere in the past 50 years to become a world superpower end economic powerhouse.
My portfolio allocation will be constantly evolving, but for right now, I’m going with 75-80% United States, 15-20% foreign markets and 5% alternatives*. I’ll reallocate about once per year. At some point in the distant future, perhaps I’ll even buy bonds.
Sheep Logic and Crazy Uncle Larry
I encourage you to always be humble and never stop learning. Living in an echo chamber where you only seek knowledge that confirms your biases is a dangerous way to live. I encourage you to seek information from smart folks that challenge you. The world is full of interesting people and books. Embrace them.
Also, have a good filter. Seek the best sources and ignore the crazy ones. Practice deep skepticism. I was talking to Jim Collins one day and he gave me this wise piece of advice for dealing with Uncle Larrys everywhere:
Seek the respect of only those who you respect.
I used to let crazy people draw me into battles, but why? If I don’t care for their silly opinions, why should I care what they think of mine? I take a different tact these days:
- Uncle Larry: THIS GUY IS DRIVING THE COUNTRY INTO THE GROUND! I’M GOING TO START HOARDING FOOD AND GOLD. I’M ALSO GOING TO BUILD A BUNKER! THE END IS NEAR!!
- Me: Have you see the new Shaun the Sheep movie? It’s really great!
- Uncle Larry: What the hell are you talking about?
- Me: It’s stop-motion animation. Clay sheep! Really great movie!
I sleep better at night.
Epilogue: My buddy Kapitalust has been writing some great stuff lately. We seem to be thinking about the same things lately because he just wrote this.
*This is separate from my cash pile which I’m working on getting up to $80,000 or two years of living expenses.
Thanks for including our conversations in your post Mr. 1500. You are correct that both sides have compelling arguments, and clearly each person has individual investment goals/objectives. I would also like to point out that Warren Buffett has started making some international investments over the last 10 or 15 years. They are small relative to his total portfolio but Iscar, BYD, PetroChina were among Berkshire’s investments over the past 5 to 7 years.
Look forward to catching up again soon. Have a great day
-Bryan
Income Surfer recently posted…Three Small Cap Value Ideas
BYD! I’ve heard of that one before and I think it was Munger’s idea, but it still surprises me. It just doesn’t seem like him at all.
… Knowing what you don’t know is more useful than being brilliant. – Love that!
The deeper I get into reading other PF bloggers, the more humbled I become in my own knowledge (or lack thereof). On the flip side, it’s exciting to know there’s so much more to learn and see other ways to grow wealth.
Thanks for sharing your allocation. Mine looks very similar, but I did end up moving 11% of my US stocks (now 69%) into bonds last year.
Hey, how did you know my Uncle Larry was the drunk one!? 😉
Michael @ Financially Alert recently posted…How To Budget Like A Badass – The Easy Way (Part 2)
Any particular reason? Most bonds have zero upside and lots of downside right now.
TGC, just a little diversification as I get older. You’re right though, there’s not much upside ATM, but I’m holding these through maturity. In hindsight it probably would have been better to move it to a stable value fund instead.
Michael @ Financially Alert recently posted…How To Budget Like A Badass – The Easy Way (Part 2)
Uncle Larry is always the drunk one. The insane rants get exponentially more insane with each beer.
Things like this really help me dissect the parts of my finances. I always felt a little heavy in US, but overall after reading through the above points, I think I am right around where I need to be (65% US, 20% Foreign). The one thing I might need to change is to get rid of the worthless 5% bond allocation I have 🙂
Thias @It Pays Dividends recently posted…Dividend Payout #16 – Extreme Savings
Yes, ditch those bonds!!
Timely discussion for me, because I’m in the middle of evaluating my portfolio allocation as well. We keep the Holiday dinners small so no Crazy uncle Larry’s to battle with.
Brian @DebtDiscipline recently posted…Net Worth Update: October 2015
Good idea about holiday dinners. We are doing the same this year.
I typically avoid those types of conversations with family. My wife and I usually end up having a few debates a year with her parents over political/religious/human rights/etc issues. Its been interesting to see them become more conservative about certain issues over the 10 years I’ve known them. Luckily everyone keeps it cordial (most of the time), but I get a big kick out of it because my father-in-law knows exactly how to push my wife’s buttons. All I can do is laugh (quietly on the inside though).
It’s cliche but I always liked: “Your mind is like an umbrella, it works best when it is open”
Your conversations sound similar. Unfortunately, some of our relatives take it many steps further into conspiracy theory territory. It amazes me what some people can convince themselves of.
I don’t so much, which is why I read and ask questions. I learn something new every day.
SavvyFinancialLatina recently posted…Shopping For Insurance
Yes, learn something every day! Never stop!
Thank you for including me in your discussions. It is very important to be asking questions, and to be skeptical. It is quite possible that people today don’t invest in international funds, because their 5 – 10 year performance is worse than US stocks. If this reverses in the next decade, then an allocation to foreign stocks would have been a wise move.
On the other hand, over the next 30 – 40 years, it is quite possible that US and foreign stocks do equally well. The only downside is that with foreign stocks your taxes would be messier due to withholdings, you would have paid a higher expense, and you would have more fluctuations due to currency.
I agree with your “better be safe than sorry” conclusion that a 15 – 20% allocation to foreign could not hurt much. As I mentioned in our interaction over the email, the more I learn and experience about investing, the more I realize how little I know.
Being humble is the best bet for ensuring your portfolio provides for you for the next 30 – 40 years.That is something we can all learn from you, and that is why I respect you ( despite the fact that I like to challenge you too 😉 )
Dividend Growth Investor recently posted…Margin of Safety in Retirement Income: How to create a fool proof dividend machine for retirement
I enjoy our conversations DGI! I also enjoy the challenges and respectful arguments. After all, questioning is how we work towards the truth. Truth is elusive, but should always be the goal.
Keep it coming! 🙂
I always enjoy your writting and thought I would add to the conversation.
You should read a couple books put out by Meb Faber, The Ivy Portfolio (documents how Harvard and Princeton have invested over the years and outperformed most asset allocations), and the Global Asset Allocation.
Overall, his work is a really good fit for FIRE individuals as he reviews not only an asset allocations performance but also it’s annual fluctuation and return as compared to risk taken. His work really helpe me determine my asset allocation and approach for my portfolio as I entered FIRE in August. I’m 36, so trying to ensure I get this part right was a key for me.
Hey, thanks a lot for that recommendation. I have added this to my reading list and it looks great. If anyone else is interested: http://www.amazon.com/The-Ivy-Portfolio-Endowments-Markets/dp/1118008855
And hey, you just retired at 36? Nice work. If you have time, tell me more or your story here or through the contact page. I’d love to hear it!
In my 401k, i have the following allocation (Age 31)
Large Cap 37%
Mid Cap 22%
Small Cap 16%
Foreign 14%
Emerge 4%
Bonds 4%
Cash 0%
REIT 3%
In my taxable account i have:
80% DGI strat spread across about 30 stocks
20% Growth stocks (gotta have some fun)
Idea is to do let the 401k index investing grow until i can tap it. And use the dividend income from the taxable account. I’ll probably start to transition over to a Roth-401k now that it’s (finally) available in my plan. The growth stocks are just a hedge since they can add a little spice to the portfolio. And obviously, when i do pull the trigger i plan to have atleast 1-2 years of pure cash to ride out any crazy downturns. Haven’t done much research into bonds yet, but suspect i’ll have some exposure here eventually decades down the line.
Also, when you are talking allocation you really want to think about things a little more indepth than just US/Non-US.
I have a worksheet I got from a friend who worked at fidelity (note, link is NOT my portfolio just hypothetical play example). I can send it to you if you’d like, i’ve added catagorie for REIT too. Pretty simple spreadsheet, im sure you get the point and could easily replicate it too 🙂
http://imgur.com/oll3lWg
The idea is you go to morningstar, select a qoute (lets say VTI). Click portfolio tab, and then fill in the spreadsheet based on “style guide” and “world regions”.
Good idea to balance large/mid/small as well as distinguish between foriegn/emerging.
http://www.morningstar.com/products/pdf/MGI_StockResearch.pdf
Oops, realized they never filled in A/B/C columns.
Column A – Amount invested
Column B – % of portfolio
Column C – expense ratio (just to keep in mind)
Yeah, I’d love to see the worksheet. Hit me up: mr1500 at 1500days dot com.
“The growth stocks are just a hedge since they can add a little spice to the portfolio.”
Your hedge/spice is my whole strategy! It’s all good.
As I think I mentioned before, the two year cash thing is a great idea, especially for me since I have almost no income producing investments.
“real knowledge is knowing the extent of one’s ignorance.” Love that! And here, here to more critical thinking and less ideologies (especially with Drunk Uncle Larry while eating turkey).
I am at 70:30 VTI/VXUS. I am very confident in the future of America (or ‘Merica!), but my net worth is already heavy in American real estate, so I don’t mind owning more international to ensure I increase my international exposure.
Speaking of questioning stats, even in this article and in these comments I heard like 5 different % of international earnings for american companies. I have no doubt US companies have international exposure, but I have a hunch those numbers don’t tell the whole story. It’s good that Colgate will sell a lot of toothpaste to India, but how do we really weight that? How do we objectively compare that with owning an international basket that includes India?
I’m a novice with the stock stuff, but just wondering if anyone can dig into that international exposure more. I’m not convinced on the keep it in the US side.
Chad Carson recently posted…The Guide to the Best Wealth Building Assets
I like your optimism Chad. Do you ever listen to Clark Howard? He is also very optimistic. I too think ‘Merica’s best days are ahead, but I don’t think we’ll see the same growth as we did during the 20th century.
“It’s good that Colgate will sell a lot of toothpaste to India, but how do we really weight that?”
I’d really like to see it broken down my profit. That makes a whole lot of sense to me.
I rebalanced my 401k this morning. It took 52 seconds. I started a timer. My Roth seems to be a bit more complex; I don’t have enough money in there to buy preferred shares of everything, so I’m deciding what to forgo for a while.
52 seconds! It takes me that long just to remember my stinking’ password!
75-80% United States, 15-20% foreign markets and 5% alternatives sounds like a good mix. You’re right that as China continues to rise, having more exposure in the US might not be as good idea. Perhaps increasing the foreign markets exposure would be a good idea in 5 years or so. Ultimately you need to go with a mix that you’re comfortable with. Being able to sleep at night is very important. You don’t want to wake up in the middle of the night and worry about your portfolio allocation. Not fun.
Tawcan recently posted…Dividend income – October 2015 update
Thanks Tawcan. You know, when I lose sleep, it’s NEVER about money anymore. This is a relief. On the other hand, my nightmares are straight out of a terrible horror movie. I think that I’m a pretty normal guy and my waking thoughts aren’t crazy. However, my nightmares, I could turn them into movies.
I can see both sides of the debate. When investing in large cap stocks, there is no way to avoid having international exposure. Most companies can’t really get that big without moving overseas for at least some revenue.
I agree with dealing with stubborn people by avoiding arguments that go nowhere. Sometimes I like to poke the bear though. Maybe that means I am actually Uncle Larry???
Vawt recently posted…Amazon Prime- Again
Poking the bear! You’re not Uncle Larry if you’re doing it for amusement purposes only. I too like gently tweaking the nutballs. Here is one thing that I don’t necessarily believe in, but say anyway to send Uncle Larrys off the deep end:
It’s always helpful to see other allocations. It helps to reassess our own situation. Love your writing, too funny.
Laura Beth
Thanks Laura!
“If anything is true, it’s that everything is changing all the time”
This is the most important thing I’ve come to realize in recent years. So many times I think “yes, I’ve finally got [X] figured out!!”, only to realize soon after that things in fact have changed (either external, or my own preferences), and to stick with your original ideas or views just for the sake of it is not a great strategy.
It’s often hard to catch yourself when you latch on excitedly to an idea (or an investment!), but like you, I really hope I manage to keep an open mind and stay humble.
Jason @ Islands of Investing recently posted…Living on the edge (of a budget)
Yeah, nothing is forever and somethings a much shorter. My wife and older child can switch moods in a fraction of a second. If you’re reading lovely wife, just kidding.
Maybe.
Though I don’t have any wise advice on the allocation front, love the “know what you don’t know” mentality. At work, the higher-ups are always talking about that specific principle. In a research field, if you think you know everything, you shoot yourself in the foot. They build a business on the idea that they can hire people that know what they don’t know. Also, Uncle Larry is my father-in-law. I wonder if HE likes Shaun the Sheep. I’ll have to bring it up in our next conversation…
Maggie @ Northern Expenditure recently posted…How Much Do Groceries Cost in Alaska?
Totally ask him about Shaun the Sheep. I think I’m only ‘Merican who enjoys that show or even knows what it is.
Do you have Mike the Moose in Alaska?
Thanks for including my thoughts in your posting! This is a great discussion and has definitely gotten me thinking more about my own allocation. Some interesting perspectives and experiences shared here that are of great benefit to all.
Hey no problem Freedom40! Keep the great comments coming!
My relatives don’t even have to drink to talk about the end of the world or the worst president in the history of the country or the best MLM/Ponzi scheme they want me to invest in while they have no idea that they are involved in a Ponzi. We just get there early to make sure we’re not sitting at the same table.
Lance @ Healthy Wealthy Income recently posted…Should You Leave Your House?
Wow ignorant minds must think alike! I’ve noticed that the nutball, political types also love MLMs. Sigh…
Thanks for the shoutout! Sorry for the late responses back to everything: went away on a little mini vacation and then when I got back I was lurking around vegan forums and blogs to try and gain insight from that side of the argument. Needless to say, I spent untold amounts of time reading and processing and reading and processing. Still haven’t come to a definitive conclusion on the whole thing.
While I find the arguments rational, logical, and sound, I can’t seem to shake my personal unease with this whole notion of converting people to the cause. I am incredibly biased against anyone trying to convert me to anything. I am stubborn as hell.
Kapitalust recently posted…The Problem with Atheist Vegans: Or the Problem with Ideology
Agh I get so ah when I hear people say ‘merica…. You know somethings wrong when you do.
I know people who were this way but it seems even they are having to change with the times. I try not to argue…. It’s difficult for me… But I’ve been getting better at buying my tongue. But I like what you said… If I don’t care about their opinion why should I care about their opinion on what I think….
Good nuggets of wisdom
The Roamer recently posted…Surprise! Why me? Dealing with bad surprises
Great post, and I was watching a Shawn the Sheep episode for the first time while I read it!
First of all, if I show my comment here on Thanksgiving, I’ve spent a lot of time reading about people’s ideas about money. This article is one of the other good articles I received. Things like this really help me separate my financial stocks. Great if you can see this article wealth advising