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Would You Take The Warren Buffett Bet?

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A couple folks asked me fun questions related to stocks and Warren Buffett recently…

Warren Buffett and Charlie Munger. Kind of.

Question #1: Stocks?

Last month, a very smart person asked me this.

How do you pick stocks?

The short answer is:

I don’t.

The longer answer is:

I mostly don’t. It’s complicated.

I realize that I’m not making much sense. I’ll try to explain.

Individual stocks mostly scare me and I’m now a big fan of indexing. However, I still buy stocks in small amounts every once in a while to amuse myself. I do this infrequently and with small amounts of money.

The last time I did this was May of 2016 when I spent $20,000 to buy a small portfolio that I created on Motif. So far, and it’s worked out well:

I’m blue, S&P 500 is green

However, it’s also completely silly to talk about this portfolio since it’s less than two years old, so I’m not going to say another word about it.

While my stock purchases are infrequent, I still like to think about them. Here is how I go about it.

 

Working Backwards

I like to consider what the world will look like in 10-20 years. Since I’m obsessed with technology, most of my thoughts gravitate in that direction. So, here is an example of one of these thoughts:

The age of humans operating cars is coming to a close. There will be a time before 2040 when it will be against the law for humans to drive in some places because autonomous cars will be so much safer.

The next question is:

What problem needs to be solved to perfect autonomous driving?

This is complicated, but on the surface, it’s a software problem. All of the hardware needed to support autonomous driving has already been developed. The software still has a long way to go though. Autonomous vehicles will rely heavily on artificial intelligence which is still in its infancy. Working backwards, the next question is:

Who will win the software race?

I believe it will be Google. Google developed software that simulates 8 millions miles of driving per day. Google is also one of the leaders in artificial intelligence research. While it will be a long time before we see who brings level 5 autonomy to the market first, I believe that it’s Google’s race to lose.

It so happens that I bought Google stock a long time ago (8/2004). While I’m not buying any more, the thoughts above contribute to my decision to not sell the stock.

 

Question #2: Would you take the Warren Buffett Bet?

Dividend Growth Investor asked me this

Let’s say Warren Buffett re-ups his famous decade-long bet. (He’s not.) He takes the S&P 500, and puts a hypothetical $1 million in it. What would you take (and why)?

For those not familiar, Buffett had a bet that an actively managed fund couldn’t beat the S&P 500. Buffett won by a mile.

Would you take the same bet today?

I would. Here’s why:

Bull markets are very hard to beat. A couple years ago at the Berkshire Hathaway meeting, Buffett himself mentioned how difficult it is to beat the returns of a healthy market. However, the bull cycle will end soon. Market multiples are at crazy highs and the bear will roar soon. If there is any period of time when active management may have an edge, it’s during a recession.

Here is the portfolio that I’d put up against the S&P 500:

  • Google (25%): Besides autonomous cars, I have another reason to believe in Google. Software is the main differentiator now in much of business and Google hires the most talented engineers in the world.
  • Amazon (25%): Traditional retail will continue to be trampled by this behemoth. And don’t forget about Amazon Web Services.
  • Berkshire Hathaway (25%): Warren Buffett and Charlie Munger will most likely have passed away by 2027, but the culture is mostly in place for continued success. Also, when the downturn happens, watch Warren work his magic with Berkshire’s massive cash reserves.
  • Alibaba (25%): China has been rising for a long time and Alibaba is riding the wave.

To hold myself accountable, I’ve create the above portfolio and invested $1,000 in it. I’ll update the status regularly.

 

I’m Not That Crazy!

I’d only take htis bet under very specific conditions:

I wouldn’t take this bet if market valuations were low like they were when Buffett started the original contest.

I wouldn’t take this bet for a period longer than 10 years. 5 years would make me feel much better.

I’m in it for the long term (many decades) and index investing is the strategy that makes the most sense to me. While I think certain companies may outperform in the near term, predicting long term trends is very, very difficult. For example, do you have any idea what the most successful stock is of all time? I would have never guessed that it would be a tobacco company.

 

What Do You Think?

Are you an indexer? Or, do you enjoy the thrill of individual stocks every once in a while?

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Comments

  1. I’d take the bet for fun, but wouldn’t bet the house or anything significant on it. I’d also know that I will more than likely end up losing.

    On your other questions, I am primarily an indexer. I recently bought one of my first individual holdings that we plan to keep for a long time. Before that, I dabbled a couple thousand in a distressed oil name and made a 150% return. I then lost 100% on a small tech bio company.

    Overall, the thrill of individual smalls caps is there for me a little, but I’ll likely stick to large cap / blue chips that align to our overall dividend strategy.

    Reply

  3. I love to gamble, but this is a bet I wouldn’t make. I’m an indexer all the way. Been that way after losing my shirt on the dot com bubble, screwing up a couple China stock investments and failing to time the post 2008 bull run. Set and let it from now on.

    Reply

  4. I’m 99.9% indexer, and sometimes (2 times a year) I buy some stocks. The way I do it is completely different than other people usually do.

    I buy company’s stock via ESPP, and as soon as the stocks are vested (every 6 months) I seel them. I sell just enough to cover my ESPP contribution, and whatever is left, I keep in the stocks as an investment.

    But in my 401(k), IRA and a house fund I use index funds only.

    Reply

  5. Damn, bought Google in 2004? That puppy has done you well. I wanted to but just didn’t have the cahones, Like the other commenter said, after losing money on the dot-com bust I shied away for good. At one point I had 100 shares of Intel and was up 400%. Then it all went poof. Well, most of it.

    I would take the bet for fun and I think your choices are good. I tend to think Amazon will emerge the bigger behemoth than Google over time.
    Accidental FIRE recently posted…2017 Summary, Proud And GratefulMy Profile

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  6. Oh man. I’m so done with individual stocks. Happy as a clam with my index funds. The real estate portfolio is the fun stuff for us.
    I have a friend who’s into Bitcoin and wants me to dip my toes in. No thank you!
    Happy New Year, Mr. 1500! 🙂

    Reply

      • I’d point out that i have a nice gaming computer with SLI 1070’s. It sits in a cold arse Den. I draw about 350 watts and it makes a perfect space heater during New England winters. I mined ETH this last winter for 5 months and will do again this winter. Elec heat isn’t THAT much better than my nat gas heat.

        Its not a lot of money and i got wildly lucky with the price rise… but i’m not complaining either. What ticks me off is i did have ~5 BTC back when blockchain first came out (i was more intrigued than anything and once again had a computer capable of mining it). Those 5 BTC are sitting on a hard drive in a dumpster somewhere LOL *sadface* 🙁

        Reply

  7. I am an indexer, but I recently toyed with the idea of buying some single stocks for fun. I decided it was not for me, even as a hobby, until our 401ks and Roths are getting maxed out every year, though.

    This was a fun read, though! I hope to have similar fun someday!

    Reply

  8. I want to see how you do against the index. Those index valuation is high, but the stocks you picked are really sky high.
    All of our retirement accounts are in index funds. Our dividend portfolio has mostly individual stocks. They have both been okay, but individual stocks are much more stressful. It’s way more work to keep track of individual stocks. news and such.
    Happy New Year!
    Joe recently posted…2017 Best of Retire by 40My Profile

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  10. I don’t pick stocks.. but I pick ETFs to feed my need for speculation. For instance recently I allocate small amount into GAMR (ETF around gaming industry) and plan to buy MJX/HMMJ (ETFs focused On Marijuana Industry). I see it as a middle ground between stock picking and Index investing.
    kowalwlasnegolosu recently posted…FIRE!! FIRE!!My Profile

    Reply

  13. Investing can be so counter intuitive! Take autonomous driving – everyone is convinced that it will be the future. And it probably will be. But the companies that support it may not actually do as well as we think. Verizon Wireless comes to mind – 20 years ago seems like the prime time to invest in a cell phone company, but it’s actually lagged the S&P. Warren Buffet likes to talk about the airline industry for the last century – up until recently an overall horrible investment in a growing industry.

    I agree good active management usually thrives in a down market. Of course, good active management is a wee bit hard to find.

    Reply

    • “But the companies that support it may not actually do as well as we think.’

      Yep. I think about Nokia and Blackberry. Who knew that they were dead a decade ago? Who knew that Apple would come in and eat their lunch.

      With autonomous cars, no-one really knows who is going to get it right. There are so many working on it (Apple, Uber, Tesla, MobilEye, Baidu). My risk is that I tied my cart to the wrong horse.

      “Of course, good active management is a wee bit hard to find.”

      Ha, yeah! There is Buffett and then??? I’m sure there are a couple other good ones, but I can’t name any of them.

      Reply

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