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Would You Take The Warren Buffett Bet?

December 27, 2017 by Mr. 1500 Days 24 Comments

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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Filed Under: Uncategorized Tagged With: buffett

Reader Interactions

Comments

  1. Balanced Dividends Mike says

    December 27, 2017 at 8:52 am

    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
  2. Garrett says

    December 27, 2017 at 9:01 am

    I wouldn’t bet on active just because you think there will be a bear market:
    https://www.investopedia.com/news/indexing-beats-active-management-bear-market/

    Reply
    • Mr. 1500 Days says

      December 27, 2017 at 11:57 am

      It sounds crazy, but I hope that I lose. Maybe that will convince me once and for all to stop thinking about stocks.

      Reply
  3. Mr. Fired & Free says

    December 27, 2017 at 11:35 am

    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
    • Mr. 1500 Days says

      December 27, 2017 at 11:58 am

      Wise, very wise!

      Reply
  4. The Friendly Russian says

    December 27, 2017 at 2:42 pm

    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. Accidental FIRE says

    December 27, 2017 at 3:11 pm

    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

    Reply
  6. Cubert says

    December 28, 2017 at 5:49 am

    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
    • Mr. 1500 Days says

      December 28, 2017 at 8:11 am

      You are better adjusted than I am! 🙂

      No matter how crazy I get, cryptos are still outside my level of comfort.

      Reply
      • Zaxon says

        January 3, 2018 at 12:59 pm

        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
        • Zaxon says

          January 3, 2018 at 1:02 pm

          But i 100% agree with your crypto WTF stranger danger.

          Look up dogecoin on google… it has a 1billion market cap….. W T F
          https://coinmarketcap.com/

          Reply
  7. Ms. Steward says

    December 28, 2017 at 8:10 am

    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. Joe says

    December 28, 2017 at 9:27 am

    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

    Reply
  9. Financial Velociraptor says

    December 29, 2017 at 8:20 am

    I’m a dirty, dirty stock picker and options trader. Have beat the S&P five years running! But that has been easy due to a raging bull market. I’m untested in a bear.
    Financial Velociraptor recently posted…More short options trades 18.13% average returnMy Profile

    Reply
    • Mr. 1500 Days says

      December 29, 2017 at 1:28 pm

      You dirty dinosaur!

      And yeah, it will be fascinating to see what happens once the market takes a dump which will probably be soon. Bring It!

      Reply
  10. kowalwlasnegolosu says

    December 29, 2017 at 10:59 am

    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
    • Mr. 1500 Days says

      December 29, 2017 at 1:28 pm

      I didn’t know that there were marijuana ETFs. Shouldn’t the ticker be TOKR?

      Reply
      • kowalwlasnegolosu says

        December 30, 2017 at 3:07 am

        They are pretty new. HMMJ is available since April, but AFAIK not for U.S investors (no problem for me). Just few days ago US-based MXJ launched (they rebranded existing real-estate centric ETF, to make launch faster). I don’t know anything about TOKR 🙂

        https://www.bloomberg.com/quote/MJX:US

        Reply
  11. Troy @ Bull Markets says

    December 29, 2017 at 5:23 pm

    I’d take the S&P 500. We are in the final 1/4 of the current bull market in stocks. When the next bear market comes, Amazon and Google (more volatile stocks) will fall more than the S&P 500.
    Troy @ Bull Markets recently posted…How QE Unwind will impact the stock market, bond market, & yield curveMy Profile

    Reply
  12. Dividend Growth Investor says

    December 31, 2017 at 10:52 am

    Ok, so I also put a few hundred dollars in my portfolio selections to keep me honest. Let’s hope I don’t forget to reinvest those dividends.

    I look forward to seeing the results in 2027… Dec 31…

    Good luck in 2018!

    DGI
    Dividend Growth Investor recently posted…My Bet With Warren BuffettMy Profile

    Reply
  13. Ron Cameron says

    January 2, 2018 at 9:22 am

    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
    • Mr. 1500 Days says

      January 2, 2018 at 10:18 am

      “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

Trackbacks

  1. Would You Take The Warren Buffett Bet? – Talking FI says:
    December 27, 2017 at 9:25 am

    […] Stocks? Last month, a very smart person asked me this. How do you pick stocks? The short… Would You Take The Warren Buffett Bet? Source: 1500 […]

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  2. VV Reads, Vol. 62: Bitcoin’s Stunning Rise, Vanguard’s New Challenge, and 4 Things Sure to Happen in 2018 - Investing Matters says:
    January 5, 2018 at 4:38 pm

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Freedom!

My goal was to build a portfolio of $1,000,000 by February of 2017; 1500 days from the birth of this blog (January 1, 2013). And hey look, I’ve since retired!

Investments only (primary home excluded)
1/1/13 (The Start): $586,043
1/1/14 (1 Yr Later): $869,635
1/1/15 (2 Yrs Later): $987,351
1/1/16 (3 Yrs Later): $1,057,961
1/1/17 (4 Yrs Later): $1,257,128
1/1/18 (5 Yrs Later): $1,527,701
1/1/19 (6 Yrs Later): $1,549,440
1/1/20 (7 Yrs Later): $2,035,040*
1/1/21 (8 Yrs Later): $3,379,746**
1/1/22 (9 Yrs Later): $4,762,642
1/1/23 (10 Yrs Later): $3,112,821

2023: Investments only
1/1: $3,112,821

Overall
2023 investment gains: $0
Investment gains since 1/1/2013: $2,526,778
Net worth***: $3,342,821

* The big jump between 2019 and 2020 was partly because we bought another home, but kept the previous (much more expensive) one as a rental. We have since sold it.

** Tesla.

*** Includes our primary home equity in addition to our investment portfolio.

Finally, we still have about $290,000 in mortgage debt (which I love!). No regrets about the debts!

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