Saturday, April 14, 2018

How To Make the Right Investments



I have constantly struggled with choosing what investments and strategy to follow. Right now I have 3 completely different portfolios. What makes them so different I would guess is my lack of commitment on making a commitment one way or the other. So I try a few different ways to generate a safe return with our retirement money.

I take a lot more risk in my portfolio where I hold 14 individual stock positions. I do not do this with my wife's money. Maybe one day when it is time to convert her RRSP into a RRIF.

I like to read everything I can on Warren Buffett and how he conveys his investing message to his shareholders and the rest of corporate America. Who knows how long we have left to enjoy one of the true masters of investing and perhaps the greatest ever.

Here is what he had to say lately on how to choose the right investments for you.


Never Invest in What You Don't Understand

They never bought Google or IBM because they didn't understand how tech companies made money.

I don't own them even though I know how a search engine works and bought my first IBM clone in 1997. In my case I didn't have the cash to invest when they debuted. I didn't buy Apple even though I bought my first Nokia phone in 2001. The iphone was introduced by Apple in 2007 and the stock exploded.

Investors have made 20X their money in those stocks but Warren and Charlie sat it out because they didn't understand the business. They have just become shareholders lately. They waited a long time to do their research and understand the business before they committed money.

Buy what you understand and can explain the business to someone who asks you why you own it and what does it do. Probably why they are the most successful investors ever.


Keep it Simple

This is probably the most overused phrase in investing. I'm using it here as it relates to the Buffett/Munger style.

When it comes to buying personal finance products simplicity is absolutely necessary. If you don't understand a financial product or service then you don't know if it's suitable in your situation. Therefore it can't be simple.

You will see this in action as people who have a small amount of money but they have spread it out into an array of too many complex investments or even duplication of certain products. The portfolio becomes complex and not very easy to explain why you have what you have.

They now don't understand and have not kept things simple. This will eventually keep you up at night. Keep not only your investments simple but make sure it applies to your whole portfolio.

All You Really Need

  • a certain amount of emergency money usually 3-5 months of your gross take home pay to cover job loss or health problems keeping you from working. Most people who like to save money can and should do this.
  • buy a term life insurance policy big enough to cover income loss so your family will not be stranded with all the bills when you're gone.
  • a portfolio of 3-4 ETFs that are tax efficient and you understand. For simple you could start with a Canadian Couch Portfolio Portfolio.
If things don't work out then your investing life is simple enough to understand why it didn't. If it works, you've met your goal for understanding and simplicity.

Borrowing to Invest

  • Munger says there are 3 ways to go broke " liquor, ladies and leverage"
  • Buffett calls borrowing to invest just "crazy" - don't ever do it.
  • you will NOT be happier even if you doubled your net worth using borrowed money. Too much risk involved and not a good way to investing success.
  • the main reason he gives against borrowing is that, in a very short period of time you can't tell how far your investments will drop. No matter how good you may think they are. Could you handle a 50% drop in the value of your leveraged portfolio?
I know I couldn't and I don't use borrowed money to make investments. If you do decide to leverage your house and buy stocks make sure you tell your wife.

My Final Take

Like all of your life, keep it simple, easy to understand and in balance. You will sleep better at night. If you can't explain what you're doing with your portfolio to anyone that asks within a couple sentences then it's not simple enough.

Read and research at your local library. Use the internet and google as your best friend to stay current and up to date on ideas to help keep life, retirement and investing simple.


Recommended Reading:

2 comments:

  1. I've always found it interesting that people feel good earning a fixed interest rate (which is usually lower than good DG dividends)because they won't loose their capital. In most cases they don't plan to use the capital, but roll it over into another FI. In other words it's money they are saving for the long-term. Also they don't think inflation is a problem for some reason.
    What we found is that the safest and most productive investment has been Income Investing. That differs slightly for DG because we don't worry if the dividend does no grow each year, we just want to know why. Take the Fin Crisis where the banks did not grow the div for a few years. The came off the Div Arist list till they finally raised their div for 5 yrs. We bought more bank stocks when they were down and as we re-invested the div's we got a lot more shares.
    Over the long term DG and Income investing has been for us the best and easiest route to financial security. The nice part for us has been "seeing the income grow each month and quarter", regardless what the market has done.

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    Replies
    1. Hi cannew, I also believe if you are retiree then you MUST become an Income Investor. I don't get the whole fixed income debate anyway. Why would a retiree want a fixed income in retirement? You want a growing income from quality DG stocks. This is the only way to stay ahead of inflation and running out of money we you need it most. Thanks for sharing your feedback and valuable experience.

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