Michael from New Jersey has just started the Success PhD investing program, and he had some questions about my recommendations for allocating investing funds. Here's Phil Town answered him:
My personal allocation of assets outside my house varies with opportunities. I see investing pretty much through the lens of Rule # 1 - which is 'Don't Lose Money' via 'Buying a wonderful business at an attractive price'. I don't much care whether the business I'm looking at is real estate, a private business, a venture capital deal or a public business. I see it all through the same lens, Rule # 1. So should you, I think.
By that I mean that investing success is all about finding some wonderful business that you understand and how good the deal is. I've been encouraged over the years to see that really great Rule # 1 investors like Warren Buffett and more recently Eddie Lampert don't seem to make much of a distinction between these groups either. Over the last few years Mr. Buffett has continued buying private businesses and Mr. Lampert may be building the next Berkshire Hathaway on the back of Sears/Kmart. (Look up his track record for a view of another 28%-for-20 years guy who follows Buffett).
If you want to be a successful investor do what the best investors do: Look for a business you understand and that you can get at a bargain price.
From that point you can depart depending on how hard you want to work. Mr. Buffett and Mr. Lampert work very hard to allocate billions of dollars for their clients/shareholders. Trust me, making 20% plus on anything over $10,000,000 is hard enough, on $30 billion it's a miracle.
Because you and I are little guys we don't have to work that hard. Yeah!
First allocation choice for a lazy Rule # 1 investor is to sit in cash. Cash never seems to violate Rule # 1. I prefer to leave the first choice only when I can't help it -- that is when the deal is so good that I simply know I'm going to make money and on that basis continue to not violate Rule # 1. Never be in a hurry. Take your time. Cash is king.
Following that simple Rule (or failing to follow it in my impatient pursuit of riches), from time to time I've been deep in real estate, venture capital, private business, or public businesses. In years past, all four areas of investing required a lot of work to keep up. Today, only the first three do. Now, because of the internet and changes in the laws, the public markets take very little time for a small investor, so that's where I am these days with most of my bucks.
If you stick to public businesses the information is so available and the people running the best businesses are so good that the only real work you have to do is know when to sell: when a great business you own gets ahead of itself in price as Mr. Market's manic euphoria for anything going up kicks in. That's the kind of problem most speculating traders would love to have, but then they like to work and are trying to make a bazillion.
Me, I'd much rather see the price hang below the Sticker and just keep working steadily upwards along with increases in EPS and Equity. It's sad when I have to say goodbye to a great business just because it got too pricey. You can see me hanging on to WFMI for just that reason. If I decide it's overpriced I've got to go to work and find something else that I like better. That sort of thing interferes with my snowboarding.
By the way, on that point: I'm afraid that when I blab about them here on the blog I may be contributing to Mr. Market's craziness, and so lately I've been trying to keep my enthusiasm for what I'm buying out of the public eye. Otherwise I just might start to think 60% returns are normal and what I deserve, and then I'd get turned into a trader, heaven forbid, instead of a snowboarding, fly fishing goof off who keeps up on things for 15 minutes a week. After last year's success I have to keep repeating the mantra "15%, 15%, 15%." to keep my feet on the ground.
So final answer: For my money stick to public businesses simply because it's so much easier to let the best business minds in the world work their butts off to make you money than to get all involved in private stuff or real estate that you have to manage yourself. Don't be afraid of putting the vast majority of what you are investing into a few great businesses and then watch them closely. If the big guys bail, bail with them and get to King Cash. It's the best low risk high return strategy I know.
Now go play!