How does Warren Buffett invest? originally appeared on Quora: The best answer to any question.
Answer by James Altucher, Blogger, Author, 90s daytrader. 2000-2001 VC fund - 212 Ventures: 2001-2005 daytrader, on Quora:
I once went to a Berkshire Hathaway annual meeting. I met a guy who told me how in 1976, he bought 200 shares.
"After a year, the stock had doubled so I decided to take some profits off the table. I sold 100 shares and started a restaurant and ran that for the next 30 years," he said. "Made a decent living." "The other 100 shares I did nothing with at all. Now it's worth over $12 million."
I admit it, I was jealous. I wanted to be him.
After that, I got a hold of Warren Buffett's letters. Not his Berkshire letters, which were available to the public, but his hedge fund letters, which at the time were private.
I studied each one. Then I wrote a book, "Trade Like Warren Buffett" (don't buy it), because when he was running his hedge fund in the 50s and 60s he was a much more active trader than he is now. Much more nimble.
Warren Buffett doesn't look at P/E ratios. He's not a value investor in the classic sense. He bets on demographic trends. The most important investing quote he's ever said is, "If a company will be here in twenty years then it is probably a good investment now." This is not always true. He said, "probably."
So what companies will probably be here in twenty years? I have no clue. Nor does he. But I will bet on the companies that are returning cash to shareholders.
As Mark Cuban told me the other day, "a company is only worth the money you get back from it." So let's look at the companies Warren Buffett (or his team) added to in 2014, and highlight the ones that are returning money to cash holders. The ones paying dividends.
USB (US. Bancorp) -- paying 2.2%. US Bancorp didn't raise its dividend in 2009, but it raised its dividend for the 37 straight years before that and has raised its dividend since.
XOM (Exxon). With the US about to become the next Saudi Arabia, I'm always looking for the leader to buy. XOM yields 2.7% and has raised its dividend for 32 years in a row. It's pretty likely this company will be here twenty years from now.
GSK (Glaxo SmithKline). People are getting old. Old people need medicine. GSK pays a 4.7% dividend and has raised it at least ten years in a row.
CBI (Chicago Bridge & Iron). What an odd name for a company based in the Hague that builds power plants, but the reality is: if we need more energy, which we do, we need someone to build the power plants. CBI has a yield of 0.40%.
WMT (Wal-mart) Buffett added also to his position in Wal-mart, the biggest store in the world. I'm on vacation in South Florida right now. I feel like there's a Wal-mart every mile. WMT yields 2.5% and has raised their dividend for at least the last ten years straight.
PSX (Phillips 66) -- again if you believe, as I do (and Warren Buffett does) that the US is going to be a bigger exporter of oil than Saudi Arabia than the marketing and refining of that oil is key. Buffett added to his PSX position, which has been raising dividends since 2002 and now yields over 2.3%.
IRM (Iron Mountain). In the past ten years, the US has multiplied by ten the regulatory requirements of corporate America. I'm not saying this is good or bad. I don't really care. But I do care about making money from it. IRM provides all storage management for companies: paper, digital, etc. And yields 3.7%. They've raised dividends for at least ten years in a row and have also been buying back shares.
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(I asked a cab driver to take me by his house. Just a simple house on a corner of a suburban block).
Ok, that's the basic idea. My rule of thumb is to always invest behind people who are smarter than me. Warren Buffett is smarter than me. One anecdote from the meeting: Someone asked Charlie Munger and Warren Buffett what was going to happen to the US dollar.
Munger, who barely spoke the entire meeting, said, "you better start burying all your valuables in your back y-"
And that's when Buffett interrupted him with a stern, "Charlie!"
I don't know what's going to happen to the US dollar. Or any of these stocks. Or my relationship with my wife. Or my relationships with my kids. One time, a doctor told me we all have cancer cells, we just don't see them all the time.
Ok, all of this is good to know. But I do think Buffett knows more about all of this than I do. And if I filter his knowledge with the basic fact that it's good for companies to pay me cash every day, and if I filter that with demographic trends, and if I throw in an added filter that these companies have been raising their dividends for years, and on top of that I say, am I diversified, then I know that I will build an ok portfolio.
And if Warren Buffett is picking all the stocks for me for free (he is my unpaid intern after all), then I'm pretty confident that this is a good start.
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Answer by James Altucher, Blogger, Author, 90s daytrader. 2000-2001 VC fund - 212 Ventures: 2001-2005 daytrader, on Quora:
I once went to a Berkshire Hathaway annual meeting. I met a guy who told me how in 1976, he bought 200 shares.
"After a year, the stock had doubled so I decided to take some profits off the table. I sold 100 shares and started a restaurant and ran that for the next 30 years," he said. "Made a decent living." "The other 100 shares I did nothing with at all. Now it's worth over $12 million."
I admit it, I was jealous. I wanted to be him.
After that, I got a hold of Warren Buffett's letters. Not his Berkshire letters, which were available to the public, but his hedge fund letters, which at the time were private.
I studied each one. Then I wrote a book, "Trade Like Warren Buffett" (don't buy it), because when he was running his hedge fund in the 50s and 60s he was a much more active trader than he is now. Much more nimble.
Warren Buffett doesn't look at P/E ratios. He's not a value investor in the classic sense. He bets on demographic trends. The most important investing quote he's ever said is, "If a company will be here in twenty years then it is probably a good investment now." This is not always true. He said, "probably."
So what companies will probably be here in twenty years? I have no clue. Nor does he. But I will bet on the companies that are returning cash to shareholders.
As Mark Cuban told me the other day, "a company is only worth the money you get back from it." So let's look at the companies Warren Buffett (or his team) added to in 2014, and highlight the ones that are returning money to cash holders. The ones paying dividends.
USB (US. Bancorp) -- paying 2.2%. US Bancorp didn't raise its dividend in 2009, but it raised its dividend for the 37 straight years before that and has raised its dividend since.
XOM (Exxon). With the US about to become the next Saudi Arabia, I'm always looking for the leader to buy. XOM yields 2.7% and has raised its dividend for 32 years in a row. It's pretty likely this company will be here twenty years from now.
GSK (Glaxo SmithKline). People are getting old. Old people need medicine. GSK pays a 4.7% dividend and has raised it at least ten years in a row.
CBI (Chicago Bridge & Iron). What an odd name for a company based in the Hague that builds power plants, but the reality is: if we need more energy, which we do, we need someone to build the power plants. CBI has a yield of 0.40%.
WMT (Wal-mart) Buffett added also to his position in Wal-mart, the biggest store in the world. I'm on vacation in South Florida right now. I feel like there's a Wal-mart every mile. WMT yields 2.5% and has raised their dividend for at least the last ten years straight.
PSX (Phillips 66) -- again if you believe, as I do (and Warren Buffett does) that the US is going to be a bigger exporter of oil than Saudi Arabia than the marketing and refining of that oil is key. Buffett added to his PSX position, which has been raising dividends since 2002 and now yields over 2.3%.
IRM (Iron Mountain). In the past ten years, the US has multiplied by ten the regulatory requirements of corporate America. I'm not saying this is good or bad. I don't really care. But I do care about making money from it. IRM provides all storage management for companies: paper, digital, etc. And yields 3.7%. They've raised dividends for at least ten years in a row and have also been buying back shares.
Ok, that's the basic idea. My rule of thumb is to always invest behind people who are smarter than me. Warren Buffett is smarter than me. One anecdote from the meeting: Someone asked Charlie Munger and Warren Buffett what was going to happen to the US dollar.
Munger, who barely spoke the entire meeting, said, "you better start burying all your valuables in your back y-"
And that's when Buffett interrupted him with a stern, "Charlie!"
I don't know what's going to happen to the US dollar. Or any of these stocks. Or my relationship with my wife. Or my relationships with my kids. One time, a doctor told me we all have cancer cells, we just don't see them all the time.
Ok, all of this is good to know. But I do think Buffett knows more about all of this than I do. And if I filter his knowledge with the basic fact that it's good for companies to pay me cash every day, and if I filter that with demographic trends, and if I throw in an added filter that these companies have been raising their dividends for years, and on top of that I say, am I diversified, then I know that I will build an ok portfolio.
And if Warren Buffett is picking all the stocks for me for free (he is my unpaid intern after all), then I'm pretty confident that this is a good start.
This questionoriginally appeared on Quora. Ask a question, get a great answer. Learn from experts and access insider knowledge. You can follow Quora on Twitter, Facebook, and Google+. More questions:
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