Posts in category Investing →
In the recent annual meeting
of the Berkshire Hathaway shareholders held last Saturday, CEO Warren Buffett was asked about the best investment idea he would recommend to an investor in his 30’s. In his own words:
I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform…and I could just go back and get on with my work.
Buy I Bonds by April 30 to earn 4.28–6.06%
I just came across this Savings Bond Advisory:
Given that the current fixed base rate is 1.20%, it would much better to invest in I bonds this month rather than waiting until May 1 or later. I bonds you purchase today will earn a composite rate of 4.28% for six months, followed by six month of 6.06%. These are much higher rates than are available in bank CDs or even other US Treasury securities
In Part I, I discussed the two main and opposing theories of investing – efficient market theory (EMT) and fundamental analysis (FA). Here I talk about which one of these two can be thought as “correct”.
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(This post is a part of the series Basics of Finance and Investing.)
It did not surprise anyone when Warren Buffett, while recently hosting a group of business students from the University of Pennsylvania’s Wharton School (his alma mater) for a two-hour question-answer session, began by pointing out the folly of the efficient market theory (EMT). After all, his objection to EMT is as legendary as his support for fundamental analysis (FA), as the foundation for smart investing.
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Why should we invest?
(This post is a part of the series on Basics of Finance and Investing.)
The short answer to this question is that we should invest to be able to shift our purchasing power from the high earning phase of our life to the low earning phase. Many of us earn more than we need to spend in our working life (note the italic – some of us spend more on our wants rather than our needs). It is the exact opposite when we retire – we spend more on our needs than we earn. Therefore, we must have adequate funds available when we retire to live out the rest of our life.
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Keeping it simple
“I did not know enough to be scared”
69-year old Earl Crawley, while making $20,000 a year as a parking-lot attendant, still amassed over $500,000 in investment asset. His secret? Two, in fact. The first is his good old habit of saving every “nickel and dime”, and the second is his lack of investing knowledge, summed up in his quote that I borrowed above.
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It is all about anticipation
And it is all in our brain. Greed and panic – the two primal human emotions – are regulated by specific regions in our brain, and they in turn control how we as investors react to market unpredictability. In an insightful article today, Jason Zweig discusses the latest advances in neuroeconomics, the branch of science that probes human brain to understand investor behavior.
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Bogle-quote on market swings
In a recent BusinessWeek interview on current market volatility, John Bogle – index fund guru and Vanguard founder – made the following comments:
In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns.
Without telling anything new, this quote still reminds us of the big picture of investing: a buy-and-hold strategy for the long haul is the only way to escape the ravages of market swings, and to benefit from the slowly (and surely) growing economy. I recommend reading the entire interview.
An investing-friendly car buying guide
There is an important difference between the two biggest single expenses in your life (if you live in America): buying a car, and making down-payment for a house. While a house appreciates in value (price goes up with time, usually outpacing inflation), the value of a new car starts depreciating the moment it leaves the dealership lot. Thus, paying 20% down for a house (the median house price was $232,000 last year) is a sound investment, whereas forking out $20,000 for a family car is not necessarily so.
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Investing abroad in turbulent times
US stock market has just closed for the day with all major indexes again taking big dives: Dow Index is down by 387 points (a single-day 2.9% drop, 2nd worst of this year), S&P 500 down 44 points (3% drop), and NASDAQ down 57 points (2.2%). In the rest of the world, London’s FTSE Index was down 1.9%, Tokyo’s Nikkei up 0.8%, India’s SENSEX down 1.4%, and Australia’s ASX up 1.1%. These are the times when many investors begin to ask if they should jack up their stock holding in foreign markets. After all, the domestic and foreign markets rarely move in lockstep, and having a chunk of my asset allocated to foreign stocks should minimize any impact of a major domestic slump.
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