Legendary investor Warren Buffett endured a marathon appearance on CNBC's Squawk Box on Monday. The good news for those of us who missed it, or didn't have the time to sit through the entire "Ask Warren" show, is that there is an unofficial transcript of all three hours. Over the course of the show, Buffett touched on everything from the price of stocks to what he's set aside for his wife, the Keystone pipeline, bitcoin, the earned income tax credit, and more.
Buffett's appearance came on the heels of the latest Berkshire Hathaway (BRK/A:US) annual shareholder letter, which included some investing advice for his wife and her trustee: "What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. . . . My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors . . ."
CNBC's Becky Quick noted this was the first time she had heard Buffett talk about this.
"You also revealed something in the annual letter this year, where you said, you laid out the terms of your will, what you've set aside for your wife. Which, I didn't know any of this," Quick said.
To which Buffett responded: "Well, I didn't lay out my whole will. . . . I did explain, because I laid out what I thought the average person who is not an expert on stocks should do. And my widow will not be an expert on stocks. And I wanna be sure she gets a decent result. She isn't gonna get a sensational result, you know? And since all my Berkshire shares are going to philanthropy, the question becomes what does she do with the cash that's left to her? Part of it goes outright, part of it goes to a trustee. But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses, and it takes care of itself."
While Buffett says the advice is intended for "the average person who is not an expert on stocks," my colleague Larry Cao, CFA, cautions that the 3% or 4% withdrawal rule mentioned here may be a “customized” recommendation taking into account both the size of the bequest and Mrs. Buffett’s lifestyle. The 90-10 split is more of the universal rule of thumb. Whether you should withdraw 3%, 4%, or 5% a year may depend on your personal situation.
Retirement security is a topic we think about a lot at CFA Institute, and it's a keystone of our Future of Finance project. What do you think about Buffett's advice? Tell us by leaving a comment in the comment section below.
Related content: "Chasing Warren Buffett’s Alpha”
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22 Comments
Well Said Buffet
There are elements that I believe may make some sense (i.e. try and be simplistic to a certain extent and keep towards lower costs to facilitate). However, as Mr. Cao indicates, the size of the endowment Warren will leave to his wife can have a rather large impact to the conversation. I have no idea what that amount is, but even given a large equity decline, I would imagine his wife still will not have a large Standard of Living risk. I like the idea behind indexing for sure but to just assume the 90/10 split will work for anyone who is a non-expert investor is neither considering that person's financial situation nor any of their behavior or emotional biases that could derail the "staying the course" mentality. I would guess that she could withstand seeing a 90% decline in the market value of her portfolio and still be more than ok.
Recall that he is essentially an insurance salesman; recall late February 2009 when he frightened the markets by suggesting financial collapse only to buy U.S. stocks cheaply as they fell to historic lows, funded by long-dated European Puts sold at a substantial premium (large skew, high implied volatility and steep term structure of volatility)....
Ashraf, Matthew, and Ryan: thank you for visiting the blog and for contributing to the conversation through your comments.
While the S&P 500 is more well known and has a catchier, simple ring to it, I'm a little surprised Buffett didn't dictate a total stock market index fund, perhaps even a smattering of an international stock index fund, too (all available for very low cost via Buffett's preferred provider, Vanguard). Diversification, after all, is THE free lunch in investing.
Now that is a sure shot win win rule for long term.. But I would rather say build a min. reserve (like six months of your expense) in cash securities and then follow this rule.
I would suggest more like 3-5yrs of cash. If you are going to avoid selling stocks at the wrong time you need to be able to look past a bear market.
Buffett's 90/10 Rule simply demonstrates his ignorance outside his areas of expertise which are selling insurance, buying cheap stock and PR. Clearly he has no idea how to construct a portfolio with good returns and low volatility. It also shows that he has zero trust in his successors at Berkshire Hathaway. Otherwise, why would he not allocate the 90% to BRK stock?
If everyone follows his advice it makes my job that much easier (and more rewarding.) Guess I should thank him...
Interesting comment re: incentive to invest 90% in BRK. First thing that comes to mind is that the "90% investments" are allocated according to their exposure to BRK - according to BRK's allocation to these firms' Board of Directors.
If this is indeed the case, then the 90% invested - over time - becomes reliant upon and generate returns simply because they cater towards BRK's performance (a quasi-front-running investment that recycles profits from the BRK-appointed Board members and management selected by the Board that are recycled into the BRK conglomerate over time and at the "right time".)
Also, I am aware of quantitative strategists on The Street that replicate Mr. Buffett's portfolio of stocks - of course, after these investments by BRK are disclosed when the % of each investment reaches various points / fall under the category of SEC regulation relating to Rule10b5. In 2000, the SEC made an administrative ruling, known as 10b5-1, or 10b5-1 (c). Benefits from the 2000 ruling:
1)
10b5-1 is a pre-set systematic method of accumulating and/or disposing of shares, the possession of insider information becomes essentially irrelevant.
By definition, this will help stem accusations of insider trading and/or front running after a trade is consummated.
In short, for executives at high profile companies that are frequently the target of shareholder suits and almost always subject to scrutiny from the investment community, this system can be invaluable.
2) When a systematic plan is in place (which this ruling provides a safe harbor against insider trading rules enacted - in particular, Form 4), investors will be able to see the insider's intentions more clearly.
Example: certain insiders liquidate shares at regular, consistent times during the year; thus, investors are more apt to be aware of and understand that an insider is simply diversifying his or her holdings, and that the remaining sizable position in the stock implies confidence in the company.
Systematic investment plans are protected by 10b5-1 and 10b5-1 (c) and are much more beneficial for both insiders and individual investors than transactions effectuated on the open market. A 10b5-1 plan allows executives to diversify their holdings without creating a stir in the investment community, and allows investors to keep an eye on executives' sales of shares.
Mr. Buffett's comments and investments appear to generate what I will call "regulatory alpha" that is almost always immune to downside moves in the captive stocks that recycle said profits and business deals, etc. back to and under the umbrella of BRK.
Just a theory, but insurance salespeople understand human behavior and BRK / Buffett are investors in insuring various front-running schemes that are legal but often obscure and always aiming toward capturing alpha and packaging it into a single investment: BRK shares.
Another way to describe this relates to options.
This rule is essentially a zero-cost put option against insider trading charges as well as a zero-cost call option that provides Buffett an option to time holdings Form 4 normally requires.
Both options have underlying securities across the global markets, providing a high degree of dispersion of choices of which stocks can be purchased.
This dispersion has value, similar to volatility, for both put and call options.
Also, since both rules 10b5-1 and 10b5-1 (c) have not been subject to any altering by the SEC for more than a decade, the expiration of these rules' consequences is unlikely to be altered anytime soon.
This also adds value to the options discussed above.
Score 1 for zero-cost option selection.
Score 2 for high VALUE such options' dispersion embeds itself in these options (again, cost $0).
Score 3 for the time-value - or "Vega" - embedded in this game of "regulatory alpha".
Score 4 for both the put and call options' biases that promote higher stock prices ("Delta").
Score 5 for political connections and the policies that created these options that are quite convenient and valuable to big-pocket campaign donations (that can be written off for tax purposes).
BINGO.
RNR
Warren Buffett has no idea how to construct a portfolio with good returns and low volatility? LOL!!!