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.

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.

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.

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…

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]