Pattie's Blog: How to get rich like Warren Buffet
Warren Buffett is shown in this file photo.
Published Wednesday, July 25, 2012 8:29AM EDT
Last Updated Wednesday, July 25, 2012 1:10PM EDT
Depending on who you talk to these days, the markets are considered to be either way too hot, with some suggesting there is far too much liquidity in the system, or way too cold with others worried about the possibility of deflation.
The problem is no one thinks the market is just right, and as a result we are seeing these extreme daily swings on every piece of economic news. Economists are again debating whether the U.S. has in fact slipped back into a recession after starting the year with hopeful job creation and surprisingly strong manufacturing numbers, both of which have since weakened. Yet there is still reason to believe they are not there yet.
And while you try to decide, there is still money to be made. Her are a few ideas…
- 1) The housing sector appears to be healing. The S&P/Case Shiller Home Price Index showed that average home prices rose 1.3 per cent in April and that is the first positive sign in seven months. As well the housing starts in June came in at their highest level since October 2008.
- 2) While job creation has been anything but robust, those who are working are working longer hours and their wages grew. Over the last 12 months, average hourly earnings for private-sector employees grew 2 per cent.
- 3) Consumers have been paying less at the pump, leaving them with more disposable income which they have been using to pay down debt. The U.S. household debt-to-income ratio is 114 per cent, down from 133 per cent. The U.S. consumer is simply not out there spending like there is no tomorrow and will likely continue to pay down their debt even further.
Given this sort of backdrop we are seeing more investors adopt a Buffett mentality. He tends to bet big when he is confident and doesn't mind watching from the sidelines when he is unsure. Here is how we can gain in our investment portfolios from a dose of Buffettology.
"Risk comes from not knowing what you are doing."
Warren Buffett became a serious investor in 1956. 56 years later, he is not trying to chase the next big investment wave. He appreciates there are many types of businesses out there and you simply cannot understand all of them. If you don't understand an investment -- move on. That is why I'm sticking with large companies that have strong balance sheets, who are leaders in their industry, continue to increase their dividends and as a bonus sell into the emerging markets.
"You can't buy what is popular and do well."
Look at bond yields in the developed countries right now. Yields are extremely low and in many cases less then 2 per cent, and we can't forget that inflation is hovering around 2 per cent. This is not how you make money. Ask yourself why you have fixed income in your portfolio? I have corporate bond exposure for safety and diversification, not for income. In this environment given the reasonable valuations and returns, stocks are favoured when it comes to generating income. As well, Buffett continues to seek opportunities and make money in sectors that many consider past their prime such as consumer staples, financials, pharmaceuticals and railroads.
"Socks or Stocks, I like buying quality."
Your greatest risk now may be sitting on the sidelines. I appreciate the concerns surrounding Europe, the Middle East and of course the fiscal situation in the U.S. however, moving into the U.S. dollar as so many do will earn you absolutely nothing. If you are concerned an extreme event will happen and want to hedge your bets, consider some exposure to gold.
I've always believed "boring is beautiful," and I want a boring portfolio. I want the portfolio that is not too hot or too cold -- the one that is just right. Slow and steady wins the race. That may mean I miss a lot of very big winners but it will also mean that I hopefully will have very few big losers -- and that's quite helpful over time. Making money is never boring.
This Global recovery is going to take time, patience and a lot of alignment. And while I'm tempted to keep adjusting my portfolio, for now I'm resisting the temptation to do so. I'll stick with a balanced approach with dividend paying stocks, corporate bonds and a little gold. Timing the market rarely proves successful and remember you have to get it right at least twice…going in and coming out.