Want To Get Rich? Skip The Buffet!


No, not Warren Buffett… I meant the buffet.  That place with sneeze guards, and endless platters of food.

Don’t get me wrong, buffets can be great.  You pay a single price, and can eat as much as you want.  Really good buffets have well prepared food, and TONs of exotic options.  More options than you can possibly eat (or fit on your plate).

But eating at a buffet isn’t all double-rainbows and lobster tails — there can also be bad food at the buffet.  Food that will make you sick, or just put a terrible taste in your mouth.

I can remember a visit to a sushi buffet in Seattle many years ago that involved just such an incident.  All the sushi looked good and tasted great… and I stuffed my face as fast as my tentacles could fill it.  It was a good meal, and I walked away satisfied.

Unfortunately that satisfaction ended later in the evening with me praying at the porcelain throne.  Yes, I puked my guts out.  It’s the only time I’ve gotten food poisoning from sushi.

seafood buffet
It was a seafood buffet (not unlike this one), that taught me a very good lesson about eating at buffets.

Investing is a lot like eating at a buffet.  You can invest as much as you want in thousands of different investing options.  There are funds, ETF’s, individual stocks, bonds, REITs, MLPs, preferred shares, real estate, p2p lending, individual businesses… the list of options just goes on and on.

It’s a lot to take-in for most investors.  Obviously you want to put your money into smart places.  With so many options to choose from, how do you decide?  Should you put a small portion into every investment vehicle you can find?  (Like taking a tiny portion of everything item at the buffet).

Or, perhaps you could invest in 10 of the highest return stock funds — essentially filling yourself up only with steak at the buffet table.

meat slicing station
You could be one of those eaters that heads right to the meat-slicing station to fill up on the fanciest items… But, in investing that won’t mean good long term returns.

There’s so many options and so many ways to invest, many people simply turn to “professional help” to make these kinds of investing decisions.

It’s no secret that I firmly believe in being a DIY investor.  But, the investing world does have some issues.

Not every investment is going to be high quality.  For every high quality investment, there will be another poor quality investment waiting in the crowd.

 

You Don’t Need To Be a Genius

Unfortunately, chasing performance isn’t the answer to finding good returns.  In fact, buying last year’s hot investing vehicle is exactly what not to do.  Buying investments after they’ve already peaked means a lower earnings yield, and ultimately lower long term returns for investors.

That said, you don’t need to be an investing genius to pick good investments that perform well.  Among stocks and bonds, research has shown that stocks outperform bonds over the long term.  Why?

Basically, stocks are operating businesses.  Businesses usually have greater returns on invested capital than returns on a bond.   If you think about it carefully, it makes perfect sense — any operating business that can’t achieve a higher return on capital than the rate at which they borrow will either go belly-up, or simply stagnate while equity capital is eroded.

It doesn’t take a genius to understand this.  It’s one of those business truths that everybody inherently knows, but sometimes we need good books like The Future For Investors to prove out the idea with real-world research.

Yes, there will be a few bumps along the way — ups and downs, recessions and the occasional depression do happen.  But, over the very long term, history has shown that operating businesses are “where it’s at” for consistently good investing returns.



Healthy And Boring 

I know what you’re thinking — If operating businesses tend to be good performers, doesn’t that mean jumping from business to business to capture the good returns and avoiding the poor performers?

Not at all!  Most of the time, “investing well” simply means not being overly smart — Just make a couple good decisions and stick with them.

I think Buffett said it best:

“Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire’s capital mushroomed and the universe of investments that could significantly affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart- and not too smart at that – only a very few times. Indeed, we’ll now settle for one good idea a year. (Charlie says it’s my turn.)”

If we go back to our buffet analogy, this is like picking green vegetables and some well-cooked chicken for your plate.  Then, only eating that for the rest of your life.

Yes, it’s boring.  It isn’t the delicious sushi, a tasty rib-eye, the lobster, or the steak tartare option.  But, you won’t get sick eating green beans and roast chicken either.

chicken dinner
A healthy, sensible, and well balanced meal eaten continuously over a lifetime isn’t exciting.  But when investing you really don’t want exciting. You want good, steady returns from one decision over a very long time.

You should see steady investing returns year after year from such an investing “meal”.  Sensible choices will mean your portfolio stays healthy over the long term… and you won’t be required to make smart investing decisions year after year.

 

The Punch Card

Diversification has long been upheld as a great way to avoid risk, simply by keeping only a little money in many investments.  But diversification can also become “de-worsification” when taken to the extreme.  You can actually hurt investing performance by being too diversified.

Putting more and more items on your plate at the buffet table simply means you have a greater chance of one (or more) of them making you sick…

one of everything
Getting ‘one of everything’ isn’t the path to a great meal, or great investing returns. It actually increases your chances of getting bad returns.

Think about it — if you own a S&P 500 index fund (like I do), do you really need more than 500 stocks to be diversified enough?  Not at all!

Simply put, you only need to make a couple good investing decisions in your life, and then DON’T SCREW IT UP.

Warren Buffett once described this idea as an ‘investing punch card’…

“You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life. I think people would be better off if they only had 10 opportunities to buy stocks throughout their lifetime. You know what would happen? They would make sure that each buy was a good one. They would do lots and lots of research before they made the buy. You don’t have to have many 4X growth opportunities to get rich. You don’t need to do too much, but the environment makes you feel like you need to do something all the time.”

There you have it — An investing punch card with 20 different ‘punches’ is all you need to build incredible wealth.  Over an investing lifetime (60 or 70 years), that means one major investing move every 3-4 years.

As investing great Seth Klarman once described it, the only thing investors really control is the decision-making process.  So, spend the time to make really good decisions.  This isn’t something you spend 30 minutes on the weekend trying to get done.

Carefully research each and every one of your 20 punches — If you do it right, you could be holding them for decades.

The rest of the time an investor should be idle, only reading about investing or business.  You could hang out at the beach to kill the time. Take time to travel.  Cook a nice meal.  Read that new Expanse novel.  Learn a new skill.

Whatever you do, don’t get bored and change things up.  Just stick with the good decisions.

Investing is where you find a few great companies and then sit on your ass. — Warren Buffett

Final Thoughts

Imagine you walked into a classy high-priced buffet and paid $100 to eat your green beans, and chicken.  For that same $100 you could have bought ten of the same meals at a regular restaurant.  You paid too high a price for your meal.

No investing post would be complete without talking about price.  Making good investing decisions isn’t just about picking the right investments, it’s also about purchasing at the right price.

The price at which you buy determines your return — Buy at the wrong price, and you’ll realize poor returns.  Buy at a good price, and you’ll realize excellent returns.

That’s often the nature of investing — whether it’s a Buffett or a buffet, it is simple and very complex at the same time.

 

[Image Credit: Flickr1, Flickr2, Flickr3, Flickr4, Flickr5]


14 thoughts on “Want To Get Rich? Skip The Buffet!

  • June 10, 2017 at 2:23 AM
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    I really dig the punch card analogy. I am not an individual stock picker, but you’re right, so many people feel they have to always be buying or selling all the time. It relieves the pressure to remember that you probably shouldn’t be doing any buying or selling most of the time.

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    • June 10, 2017 at 2:26 AM
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      The punch card analogy applies to more than just individual stocks! Any investment class can qualify as a ‘punch’!

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  • June 10, 2017 at 3:45 AM
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    What an interesting analogy! I never thought eating at a buffet had so many things in common with investing. I do enjoy buffets, but sometimes I do feel a bit sick from eating all the random food there.

    Boring stuff might not be appealing, but as long as it’s safe and stable (i.e. relationships, homecooked meals, investment portfolio), I will stick with it to make my life simpler. However, the thought of taking on a thrilling adventure is also exciting sometimes!

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  • June 10, 2017 at 4:21 AM
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    Making a logical extension to the analogy: you know you need green beans and chicken for dinner. Put a little time in to learn to cook and shop, and you’ll have dinner faster and cheaper at home than at any restaurant.

    Ditto for DIY investing — once you have determined what you need.

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  • June 10, 2017 at 4:40 AM
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    Nice analogy. On an aside we have an all you can eat sushi place here that does it made to order. Infinitely fresher though you still get what you pay for with a limited selection. Which gives one more analogy I guess. There is no free ride. In stocks there are no riskless options. Everything has a risk and your job is to mitigate it with diversification while maximizing your return as much as possible, but the risk is still present.
    FullTimeFinance recently posted…Of Charm and Pursuit

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  • June 10, 2017 at 5:12 AM
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    That is a great analogy. Buffets offer many choices, but more than you need. Investment companies do the same. A total stock, international, and bond index fund is all that most investors need. Just select the appropriate allocation based on your age and risk tolerance.

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    • June 14, 2017 at 9:20 AM
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      I totally agree Dave. More index funds than that is just over-diversification.

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  • June 10, 2017 at 5:25 AM
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    I’ve got my experience with eating at buffets too, and it wasn’t pleasant. Later I found out that buffets usually serve food ready to expire. Of course you can take your time and research all the dishes, observe them, take a smell for the suspicious odor, or you can go with a history proven grocery shopping and buy healthy and not so expensive quality food for you and your family.

    Like your analogy Mr. Tako.
    Friendly Russian recently posted…May 2017 Net Worth Update – $111,013.60

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  • June 10, 2017 at 3:20 PM
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    I love me some Korean all you can eat BBQ =)

    I’m not smart enough to pick stocks, so I stick with index funds.

    Majority in stuff that mirrors the wilshire 5000.

    Love warren buffet. I’m happy that a decent chunk of the s&p500 is berkshire!

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  • June 11, 2017 at 3:43 PM
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    I love your analogy. Buffets don’t necessarily mean they are better than a la carte. Buffets typically don’t have as high quality compared to a la carte.

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  • June 12, 2017 at 5:18 AM
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    Great analogy Mr Tako. Too much diversification can indeed hurt performance. Having international exposure has reduced returns to many index portfolios over the past 20 years or so..

    On a side note, the S&P 500 or Vanguard Total Stock Market have similar returns to Dow 30 over the past 25 years or so. And 50 or so companies on S&P 500 account for more than half of the index..

    It sometimes pays to look under the hood. Though indexing is probably a very good choice for most people who have little time/patience or interest in investing.

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  • June 12, 2017 at 8:58 AM
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    I like the punch card idea too. I try not to trade too much every year, but still have a few transactions per year. I should put a limit on it and trade just twice per year.
    We don’t go to buffet anymore. Mrs. RB40 doesn’t eat enough for them to be worth it. I only went a few times in my 20s with my buddies. Always ate too much and felt bloated afterward. Now we prefer quality over quantity.

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  • June 14, 2017 at 9:07 AM
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    Nice analogy! You just reminded me of this time I got food poisoning from a seafood buffet. Oh man, it was so bad I ended up in the hospital! Apparently I had been throwing up so much, I lost a ton of fluid, didn’t eat for 2 days, and my blood pressure plummeted to dangerously low levels. Not fun.

    Now we avoid buffets, not just because of that experience, but because we never eat enough for it to be worth it.

    That being said, I’m still going to stick with index investing. In fact, Warren Buffet is an advocate for indexing, which is why he made a million dollar bet that his index funds would beat actively managed funds. “Buffett contended that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over the 10 years ending December 31, 2017. The bet pits two basic investing philosophies against each other: passive and active investing.” Looks like he’s winning the bet so far!

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    • June 14, 2017 at 9:15 AM
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      Why did you get the impression I’m advocating against indexing? I’m certainly not! About half our wealth is in index funds! Just not too many of them.

      Hedge funds are certainly high-fee investments that mostly don’t outperform. It’s probably best to stay away from those.

      Reply

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