A couple folks asked me fun questions related to stocks and Warren Buffett recently…
Question #1: Stocks?
Last month, a very smart person asked me this.
How do you pick stocks?
The short answer is:
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:
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.
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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