MONEY Master the Game: 7 Simple Steps to Financial Freedom (73 page)
Read MONEY Master the Game: 7 Simple Steps to Financial Freedom Online
Authors: Tony Robbins
Jack Bogle Portfolio Core Principles
1.
Asset allocation in accordance with your risk tolerance and your objectives.
2. Diversify through low-cost index funds.
3. Have as much in bond funds as your age. A “crude” benchmark, he says.
Jack is in his 80s and has 40% of his total portfolio invested in bonds. But a very young person could be 100% equities.
So in my total portfolio, including both my personal and retirement accounts, about 60% of my assets are in stocks, mostly in Vanguard’s stock index funds. The rest is split between Vanguard’s Total Bond Market Index Fund and tax-exempt [municipal bond] funds. My municipal bond holdings are split about two-thirds in Vanguard’s Intermediate-Term Tax-Exempt Fund and about one-third in Vanguard’s Limited-Term Tax-Exempt Fund
[limited being somewhere between short and intermediate; a little bit longer for the extra yield].
I won’t need to draw on the money, I hope, in my taxable portfolio. And those are still nice tax-exempt yields, around 3% or so, which is the equivalent of 5% for someone in my tax bracket, and I don’t need any more than that. I’m happy to get it.
I worry a little bit, of course, about the solidity of the municipal bond market, but I’ve decided that with our top-notch analysts here at Vanguard, they should be okay.
In my tax-deferred portfolio, which is my largest asset, my bond assets are largely in Vanguard’s Total Bond Market Index Fund.
That includes long-, intermediate-, and short-term bonds. It holds Treasury, mortgage, and corporate bonds.
I’m very satisfied with the returns on my total portfolio. After an awful 17% decline in 2008 [the S&P 500 was down 37% that year, more than twice as much], my returns have been consistently positive, averaging almost 10% per year. I’m happy to simply “stay the course” and ride it all out.
CHAPTER 6.4
WARREN BUFFETT: THE ORACLE OF OMAHA
The Legend Who’s Said It All; CEO, Berkshire Hathaway
I was in the greenroom of the
Today
show, waiting to go on the air, when in walked
the man
himself: Warren Buffett, one of the greatest investors of the 20th century and, with $67.6 billion to his name, the third wealthiest man in the world. We were scheduled to appear (together with Spanx founder Sara Blakely and future secretary of Housing and Urban Development Julian Castro) in a roundtable discussion with Matt Lauer about economic success and our views on the direction of the US economy. I’ve always been a huge fan of Buffett’s. Like millions of investors around the world, I’ve been
inspired by the story of how a humble stockbroker from Nebraska turned a failing New England textile business called Berkshire Hathaway into the fifth largest publicly held company in the world, with assets of nearly a half trillion dollars and holdings in everything from Geico insurance to See’s Candies. His not-so-secret to success has been “value investing”: a system he learned and perfected from his mentor Ben Graham. It revolves around looking for undervalued companies and buying stock with the expectation it will rise in price over the long term. It’s one of the simplest forms of asymmetric risk/reward, and one that requires a tremendous amount of research, skill, and cash—which is one of the reasons Buffett pursued insurance holdings that throw off great cash flow and thus investment opportunities.
Not only has Buffett been phenomenally successful in business, but also he’s become one of the most generous philanthropists in history, pledging 99% of his vast personal fortune to charity through the Bill and Melinda Gates Foundation. He’s also probably the most quotable—and quoted—business leader ever, and you’ve already read some priceless nuggets of his wisdom sprinkled throughout these pages.
When I finally had him in the same room with me, I couldn’t resist the opportunity to tell him about this book project. Perhaps we could sit down for an interview about how the individual investor can win in this volatile economy?
He looked up at me with a twinkle in his eye. “Tony,” he said, “I’d love to help you, but I’m afraid I’ve already said everything a person can say on the subject.”
It was hard to argue with that. Since 1970, he’s been putting out an eagerly awaited annual letter to his shareholders filled with plain-spoken investing advice and commentary. Plus, there have already been nearly 50 books published with his name on the jacket—even a few of them written by Buffett himself!
Still, I pressed ahead.
“But now that you’ve announced you’re leaving almost all of your wealth to charity, what kind of portfolio would you recommend for your family to protect and grow their own investments?”
He smiled again and grabbed my arm. “It so simple,” he said. Indexing is the way to go. Invest in great American businesses without paying all the
fees of a mutual fund manager and hang on to those companies, and you will win over the long term!”
Wow! The most famous stock picker in the world has embraced index funds as the best and most cost-effective investment vehicles.
Later, even after Steve Forbes and Ray Dalio reached out on my behalf to encourage Warren to have a more detailed interview with me, he let me know there was no need. Warren told me that everything he had to say about investing that’s important is already published. All he would tell an individual investor today is to invest in index funds that give you exposure to the broad market of the best companies in the world and hold on to them for the long term. I guess repetition
is
the mother of skill. I got it, Warren! In this year’s letter to the shareholders, Warren emphasized the same advice to all investors once again! What’s his asset allocation? Below are the instructions he has left for his wife and their trust after he has passed:
“Put 10% . . . 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—whether pension funds, institutions, or individuals—who employ high-fee managers.”
Jack Bogle is very happy about this advice! America’s most respected investor is endorsing the strategy Jack has promoted for almost 40 years!
Remember, Buffett made a $1 million wager against New York–based Protégé Partners betting that Protégé could
not
pick five top hedge fund managers who will collectively beat the S&P 500 index over a ten-year period? Again, as of February 2014, the S&P 500 was up 43.8%, while the five hedge funds were up 12.5%.
The Oracle of Omaha has spoken!
CHAPTER 6.5
PAUL TUDOR JONES: A MODERN-DAY ROBIN HOOD
Founder, Tudor Investment Corporation; Founder, Robin Hood Foundation
One of the most successful traders of all times, Paul Tudor Jones started his own firm at the age of 26, after cutting his teeth trading cotton in the commodity “pits.”
Paul has defied gravity, having produced 28 straight full years of wins. He is legendary for predicting Black Monday, the 1987 stock market crash that saw a 22% drop in a single day (still the largest percentage stock market
drop in any day in history). At a time when the rest of the world was experiencing a meltdown, Paul and his clients captured a 60% monthly return and a nearly 200% return for the year!
Paul is one of my closest friends and personal heroes. I’ve been privileged to be his peak-performance coach since 1993—21 of his 28 full consecutive years of wins and the majority of his trading career. What’s even more impressive to me than Paul’s stunning financial success is his heartfelt obsession to constantly find ways to give back and make a difference. As the founder of the iconic Robin Hood Foundation, Jones has inspired and enrolled some of the smartest and wealthiest investors in the world to attack poverty in New York City. Paul and the Robin Hood team do this work with the same analytical rigor that hedge fund billionaires typically reserve for financial investments. Since 1988, Robin Hood has invested over $1.45 billion in city programs. And just like Jones’s relentless pursuit of asymmetric returns in his financial life (he’ll share his rule of 5 to 1 in a moment), his foundation work is no different. Robin Hood’s operating and administrative costs are covered 100% by board participation, so donors earn a 15-to-1 return on their investment in their community! As Eric Schmidt, executive chairman of Google, says, “There is literally no foundation, no activity, that is more effective!”
Jones himself will tell you he’s a trader, not a traditional investor, but like his former employer, E. F. Hutton, when Jones talks, people listen. As a macro trader, he studies the impact of fundamentals, psychology, technical analysis, flows of funds, and world events and their impact on asset prices. Instead of focusing on individual stocks, he bets on trends that are shaping the world—from the United States to China; from currencies to commodities to interest rates. He is sought out by some of the most influential financial leaders on the planet: finance ministers, central bank officials, and think tanks around the world.
I met Paul for this interview at the magnificent campus in Greenwich, Connecticut, for his Tudor Investment family. During the interview, we dug down for the most valuable investment principles he has to share to benefit you, the individual investor. As a result, Paul is about to give us his “$100,000 business education,” the one he shares with his own family of traders and a few university students fortunate enough to hear his message each year. All this wisdom in just six pages.
TR: | Paul, what you’ve done in investing, in trading, is extraordinary: 28 consecutive wins—28 years without a loss. How does a mortal do that? |
PTJ: | We’re all products of our environment. I started out as a commodity trader in 1976. The great thing about being a commodity trader—trading cotton, soybeans, orange juice—is that [those] markets are hugely impacted by weather. In a space of three or four years, you’d have huge bull markets and huge bear markets. I very quickly learned the psychology of the bull market |
TR: | Wow! |
PTJ: | So I learned how quickly it can all go away; how precious it is when you have it. The most important thing for me from that is that defense is ten times more important than offense. The wealth you have can be so ephemeral; you have to be very focused on the downside at all times. |
TR: | Absolutely. |
PTJ: | When you have a good position in something, you don’t need to look at it; it will take care of itself. Where you need to be focused is where you’re losing money, and that’s actually when people generally don’t want to look: “My account’s going down. I don’t even want to open it.” |
TR: | What do you think are the biggest myths that the general population has about investing? What hurts them? |
PTJ: | You can invest for the long term, but you’re not going to necessarily be wealthy for the long term—because everything has a price and a central value over time. But it’s asking a lot, I think, of an average investor to understand valuation metrics all the time. The way that you guard against that—guard against the fact that maybe you’re not the most informed person of every asset class—is you run a diversified portfolio. |
TR: | Of course. |
PTJ: | Here’s a story I’ll never forget. It was 1976, I’d been working for six months, and I went to my boss, cotton trader Eli Tullis, and said, “I’ve got to trade, I’ve got to trade.” And he said, “Son, you’re not going to trade right now. Maybe in another six months I’ll let you.” I said, “No, no, no—I’ve got to trade right now.” He goes, “Now, listen, the markets are going to be here in thirty years. The question is, are you?” |
TR: | How perfect. |
PTJ: | So the turtle wins the race, right? I think the single most important thing that you can do is diversify your portfolio. Diversification is key, playing defense is key, and, again, just staying in the game for as long as you can. |
TR: | Following up on diversification, how do you think about asset allocation in terms of playing defense? |
PTJ: | There’s never going to be a time where you can say with [absolute] certainty that this is the mix I should have for the next five or ten years. The world changes so fast. If you go and look right now, the valuations of both stocks and bonds in the United States are both ridiculously overvalued. And cash is worthless, so what do you do with your money? Well, there’s a time when to hold ’em and a time when to fold ’em. You’re not going to necessarily always be in a situation to make a lot of money, where the opportunities are great. |
TR: | So what do you do? |
PTJ: | Sometimes you just have to say, “Gee! There’s no value here, there’s nothing compelling. I’m going to be defensive and run a portfolio where I don’t have any great expectations. I’m going to be in a position where I don’t get hurt, and if and when values do rise, I’ll have some firepower to do something.” |
TR: | Okay, any specific strategies for protecting your portfolio? |
PTJ: | I teach an undergrad class at the University of Virginia, and I tell my students, “I’m going to save you from going to business school. Here, you’re getting a hundred-grand class, and I’m going to give it to you in two thoughts, okay? |
TR: | And so he made his money from the cash flow of all his insurance companies. |
PTJ: | He sat through one of the greatest bull runs in the history of civilization. He withstood the pain of gain. |
TR: | Amazing. So my next question is, how do you determine the trend? |
PTJ: | My metric for everything I look at is the 200-day moving average of closing prices. |