Where should you invest your first million?

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My friend Tim Ferris (author of the Four Hour Workweek, which I reviewed here and hundreds of iwillteachyoutoberich readers bought) asks Warren Buffet how someone should invest their first million.

What do you think Warren Buffet says?

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16 Comments

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  1. This must be an excellent affirmation for you. Way to go…

  2. Right again, Ramit. Interesting that comment about Ben Franklin, too. I’m now remembering an early title we tossed about, which you should still use, somehow.

  3. My guess would be in an index fund – low fees and no attempts by a money manager to try and beat the market. Managers like Buffet are rare, and most are actually just lucky, so you’re better off with an index.

  4. Great, solid advice. I like how he deliberately states that people will not tell you to put money into index funds because they will not make commissions off of it. How can you argue with the richest man in the world?

  5. I agree that index funds are an excellent choice for most individual investors. Why, then, do I host a web site whose raison d’etre is to help investors – individual as well as institutional – discover tomorrow’s best-performing stocks . . . today?
    The answer to that question is both simple and compelling: There always have been – and it can reasonably be argued that there always will be – select stocks that decisively outperform the market averages. Most investors are familiar with the performance of Microsoft and Intel during the ‘80s and ‘90s, Dell Computer and Cisco Systems during the ‘90s and Google during the current decade. The performance of these stocks offers convincing proof that select stocks can and do outperform the market averages.

  6. The “and get back to work…” part of Buffet’s answer is the message he wanted to pass. Work. Don’t let investing distract you.

  7. Excellent blog article.

    I especially like his simple but elegant answer of index funds and getting back to work.

  8. Wow…that was almost spot on with what I was about to say (I thought this was just an “Ask the Readers” type post).

    Anyways, I was about to say that I’d throw it in some AAA bonds and keep doing what I do. I’m 23 and I love my job :)

  9. Holding an S&P 500 index fund over the last 10 years would have given you about 5% average return in that time. Factor in inflation and if that investment happened to be in a taxable account and your return is basically nothing. All the while, your are subject to major market risk and fluctuations.

    Buffett made his money through company takeovers/risk arbitrage and being a fierce negotiator for his company/shareholders….not by investing in an index fund.

    This is a classic case of being quoteable, but not correct. By the way, I’m honestly a huge WB fan! Below is the url to more of his famous quotes…
    http://en.wikiquote.org/wiki/Warren_Buffett

  10. Evan, you bring up a good point that’s worth elaborating.

    Well, let’s not beat around the bush. Buffett is a better investor than the vast majority of us. It’s as simple as that. Yes, he does things differently from us, but that’s because he is able to mitigate the risk that most everyone else would be exposed to simply because of his skill level. And hence, he is also able to enjoy the higher return.

    Truth is, Buffett’s investment style is also notoriously cautious. And I don’t think he’s being hypocritical by saying that a 30 year old (with an assumed investing knowledge of an “average” 30 year old) should just focus on low cost index funds. Again, it’s following his belief that one should invest into the market, not constantly try to out-smart it.

    To do the latter would require what Buffett believes to be an extraordinary amount of time, energy, and intellectual effort towards such pursuit. It’s something that not everyone has the time nor the opportunity to do so.

    However, if you do have the time, energy, and passion for it, then he has said that one should not diversify at all. Quoting from one of his speeches, “5 to 6 positions is all you need.”

  11. It’s amazing to read through the comments on Tim’s blog. In the face of simple, sound advice from the world’s investment guru, you find so many people who apparently know better that Warren Buffett and offer their recommendations on investing in hedge funds, real estate, start-up companies, etc. Kind of unbelievable, actually.

  12. Rachel: Exactly. People love to think they know more than collected wisdom of others. Especially when it’s a sexy investment that lets them beat the market. To those people, matching the market is “boring” (so they spend over $100 billion each year trying to seek alpha).

  13. Funny stuff. One question, knowing that Buffett has outperformed the S&P 500 by a very wide margin over 43 years, why would you not just buy Berkshire Hathaway B’s?

    Sometimes the simplest answers are right in front of you!

  14. David, that’s another very good question… one that I hope someone will step up to the mic and ask Buffett some day.

    This is just my personal opinion, but while I hero-worship Buffett and strive to learn as much as I can from him, the truth is, I think Berkshire shares are currently over-valued. Oh yeah, I went there.

    Why do I think this? In short, Buffett has become more than an iconic investor or even a household name. Like it or not, he has also become Berkshire’s best-selling brand! And he doesn’t seem to mind at all!

    I think the picture that paints this most vividly is the cable documentary I once saw called, “The Billionaire Next Door”. I’m sure many of you have seen it too. In short, I think the Buffett name (and the plays he make) artificially drives sales more than is normally possible simply because of the Buffett name. (That is not a bad thing per se right now, but bear with me.)

    Buffett himself also points to two other signals that suggest to me that if he was in our shoes, he would not invest in Berkshire right now.

    The first is that he said it’s a lot harder to move the % needle with billions rather than with thousands. The sheer size of his company’s fortune makes his choices much more limited.

    The second is that Buffett targets companies that are not only solid, but are inherently undervalued (read: overlooked by the rest of the market). Does Berkshire Hathaway pass this simple litmus at this point in time? Need I state the obvious?

    In his shareholder letters, Buffett has also warned about slowing growth in the short-term, but here is the thing that really struck me:

    Both Buffett and Munger are not exactly young. I mean, they still seem quite sharp and fit for men of their age, but seriously…. And have you seen their diets too? Buffett may be frugal, but his diet would give any Nutritionists an early heart attack.

    I hate to say it, but in all seriousness, the reality is that Buffett could have a heart attack at any moment. And while succession plans have already been put in place, there is no doubt in my mind that Berkshire’s current stock price would seriously suffer from the loss of the Buffett brand.

    Because of this, in my personal opinion anyway, I highly doubt that Buffett would invest in Berkshire right now if he was in our shoes.

    I think what is much more important is to learn as much as we can from this living legend while he is still here with us, and to enlighten and empower our generation and the next so that we too can be our own Buffett.

  15. ekrabs, very good points. I’m definitely not saying I know more than WB so don’t get me wrong! My point is that he would not follow his own advice of investing in an index fund and getting back to work. At least that is not what he has done…
    The key here that was mentioned above is that yes, this is the best advice for your average 30 year old working full time with limited knowledge of investing.

    Another key point is that it is not about BEATING the market year in and out. It is about limiting risk. “Rule #1, never lose money. Rule#2, never forget Rule #1″- Warren Buffett. Index funds will have long periods of negative growth at some point. There are many investments available paying 7%+ with little risk. I will take a diversified portfolio of income bearing investments each year, and let everyone else watch their S&P fund crash and recover repeatedly losing out on compunded annual growth.

    I would encourage people to look into WB’s actual investment strategies, but then again if you don’t want to mess with anything…

  16. Warren Buffet is the man.
    Hey just a tip (something I have found frustrating with your site)
    There are not enough posts per page. So when trying to scrool through and read all your latest posts I had to click on new page about 5 times to find a post I really wanted to read. I would prefer if you had more than 2-3 posts/page.

    Love the site, love the content, keep writing