“No empire lasts forever.” -a sign on a co-workers desk
“There have been thousands of American car companies. Almost all of them are now gone. When the car came out, instead of investing in a car company, a better idea would have been to short horses.” -Warren Buffett at the 2013 shareholders meeting.
What do those quotes mean? More on that in a moment. First of all, I need to show you the rest of my portfolio* including my single largest holding :
- Fidelity Contrafund (FCNTX), $247,519: I’m not a big fan of this fund, but it happens to be the least evil option in my 401k. The fees aren’t terrible, but they aren’t great either. However, the company match ($2000/year) and the incredible tax benefits of a 401k make it worthwhile.
- Vanguard S&P 500 (VFIAX), $108,322: This is my first move towards a rational investment strategy! When I started this blog, I didn’t really know much at all about index investing. MMM and Jim Collins set me straight, although I probably should have purchased VTSAX instead.
- Vanguard Technology (VGT), $69,411: I’ll always have a soft spot in my heart for technology stocks. This Vanguard, sector-specific index fund allows me to invest in technology, but be a bit diversified.
No Empire lasts forever
Investing in individual stocks is dangerous business. Most companies that have ever existed are now long gone. Incredibly, according to this article, most businesses now only last 15 years. It’s easy and fun to ride a hot stock up, up, up. It’s much harder to know when to sell. Back in the Internet boom around 2000, I was jumping up and down when an Internet mutual fund I bought went from $10 to $120. I wasn’t jumping up and down when it sank back below $10. Just a short time ago, Blackberry and Nokia were on top of the world. Now Apple, Samsung and Google have toppled their empires. Amazing.
What if the Apple or Google or facebook that I hold now is at the top of its apogee? I could be in for rough times. On the other hand, what if I sell and the apogee is still 2 decades away?
Holding stocks is like holding lit sticks of dynamite with fuses of unknown length. Apple could continue to do great for 25 years. On the other hand, companies like Samsung, Xiaomi and Google could bury Apple before the decade is up. No one knows.
So, as long as I hold these stocks in such large quantities (Apple and facebook are almost 1/3 (!) or my portfolio), I’m asking for trouble. Technology stocks are especially dangerous because of the intense competition and amazing rate of innovation. Think what phones looked like 10 years ago!
The solution is to lessen my exposure to these stocks. The one big problem I have is taxes. If I sold now, I’d be hit with a hefty tax bill due to capital gains. If I sell them in retirement, I probably won’t have to pay a dime in capital gains because our income will be much lower. I’m at least another year from retirement, so I need to hold out for a bit longer. One compromise may be to hit the sell button on some shares on 1/1/2015 and then again on 1/1/2016. Another idea would be to set up a stop-loss order (thanks reader suggestion!).
In any case, here is what I’ll put future money into:
- Index funds: It’s no secret that active fund managers have a very difficult time beating the indices. Add in their high fees and an actively managed fund usually performs poorly. Again, MMM and Jim Collins have explained it all very eloquently, so I defer to them.
- Peer lending: I’ve been on Lending Club and Prosper before they were cool (4+ years). I like these platforms as an income stream.
- Berkshire Hathaway: This is the one stock I’ll consider holding in large quantities far into the future. See discussion below.
- Dividends: Only 2 of my holdings pay dividends, Apple and Costco. I’ll probably increase my dividend holdings in the form of a Vanguard fund.
- Real estate and REITs: I don’t want to be one of those people who have 20+ rental homes. However, a couple would be really nice.
- Home flips: We were pretty good flippers. We’d buy an ugly home, make it beautiful, and sell it for a fat profit. I need to write a post on this. I wouldn’t mind doing a couple more should the right opportunity present itself.
My ideal mix in a $1,000,000 portfolio would be the following:
- $600,000 in the stock market, made up of mostly index funds
- $300,000 in 2 rental properties or one multi-family
- $100,000 in peer lending
With the above mix, the peer lending and rental income would generate most of the income I need for day to day life.
For Steve over at the Kapitalust; why I still like Berkshire Hathaway post Buffett and Munger
Steve asked me recently about my thoughts on Berkshire Hathaway post Buffett and Munger. Buffett is 83 (wish him a happy 84th on 8/30!) and Munger is 90, so their time on our blue-green sphere is almost up. Sigh. This worries some people and it used to worry me too, but not anymore. Here is why:
- There are other brilliant people at Berkshire: Ajit Jain is one of them. Many of these folks have worked with Buffett for years and understand what makes Berkshire tick.
- The culture is established and strong: I believe that the people who work at Berkshire won’t spoil the culture. I don’t think that any successor to Buffett is going to start playing with crazy derivatives or buy an NFL team.
- The holdings are strong: Berkshire owns very solid companies like BNSF. Other big investments include Coke, American Express and Wells Fargo. These are businesses that aren’t going away any time soon. It would take a long time to drive Berkshire into the ground.
- Buffett has installed a safety mechanism: Buffett’s son Howard has one role in Berkshire after Buffett dies, to guard the culture. If someone at Berkshire were to behave in a way inconsistent with Berkshire values, Howard has the power to hit the eject button, James Bond style.
This isn’t to say that everything will be roses. One of Berkshire’s greatest assets is the Buffett name. I’d bet that a lot of people all over the world know who Warren Buffett is. Ajit Jain or Ted Weschler, not so much. There will never be another Buffett or Munger, but I expect Berkshire Hathaway will be strong for decades to come.
Phew, glad that’s over
I’m happy I got that over with. If you read parts 1 and 2, you know where the rest of my money is. If you read this one carefully, you know that my portfolio has a lot of speculative investments that could very will burn me at some point in the near future. While I hope that doesn’t happen, it would make for some good blog drama.
*Astute readers will notice that my numbers don’t match the number on my column at the right. Besides the stuff I’ve mentioned, I also have money in peer lending, cash and several other small funds in my 401k. Because each of these is around $10,000 or less, I didn’t think they were worth mentioning.
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