All About Retirement In A Warren Buffett Context

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All About Retirement In A Warren Buffett Context

 All About Retirement In A Warren Buffett Context

It is strange yet understandable that the greatest investor of all times has his investment thesis revolving around simplicity. Famous for his discipline and conservative approach to investing, Warren Buffett, an American business tycoon, speaker, investor and philanthropist has often been referred to as the Wizard, Sage and Oracle of Omaha for his investing style. Investors preach and follow his tips religiously with the hope of being successful in their own investments.

Today’s article would revolve around the retirement strategies that Mr Buffett believes in, and advice that he has for people to have a saner after-work life. But before devouring ourselves to his investment philosophy, let us get acquainted with the Wizard and his company:

Warren Buffett

Regarded as one of the most successful investors of all times, Warren Buffett was born in Omaha and developed an inclination towards investing in his youth. He brushed his investing skills at the Columbia Business School and attended the New York Institute of Finance. Mr Buffett created Buffett Partnerships Limited in 1956, which went on to acquire Berkshire Hathaway, a textile manufacturing company, which presently owns over 60 companies worldwide (including Duracell, Dairy Queen and Geico).

Since the acquisition, Mr Buffett has been the company’s largest shareholder and Chairman. The pioneer has pledged to give away over 99 per cent of his fortune towards philanthropist causes and in 2019, he donated US$3.6 billion, majority of it to Bill and Melinda Gates Foundation.

Mr Buffett’s real time net worth (as on 24 September 2019) was US$81.6 billion.

Berkshire Hathaway

An American multi-national conglomerate holding company, Berkshire Hathaway Inc. has a diversity of products- investments, insurance, food processing, aerospace, utilities, automotive, consumer products and retail, to name a few. It was founded by Oliver Chace and Warren Buffett and is headquartered in Omaha. The company is best known for leadership and control by Warren Buffett. It has averaged an annual growth of 19 per cent in book value since 1965.

Consolidated Financial Update as of second quarter ended 30th June, 2019

As per the financial results, which was released in August 2019, the company’s total revenue (by its operating businesses) was up by 2.3 per cent on a Y-O-Y basis, to US$63.6 billion. The operating earnings amounted to US$6.14 billion (down by 11 per cent on previous corresponding period). The decline was primarily driven by lower underwriting income at the company’s insurance operations. At the end of the period, the company had the highest amount of cash and equivalents at US$119.12 billion, on its balance sheet. This was as compared to US$110.5 billion reported at the end of 1Q 2019.

Share Price Information

The stock of Berkshire Hathaway Inc. trades on the New York Stock Exchange (NYSE), as BRK.A (Class A), and BRK.B (Class B). On 24 September 2019, the (NYSE: BRK.A) stock quoted $3,10,356 USD at market close, down by 0.92 per cent. The market cap of the company was $505.96 billion, and the P/E multiple was 17.61X.

On the same day, the (NYSE: BRK.B) stock quoted US$206.40, down by 0.75 per cent, with a P/E multiple of 0.012X.

It should be noted that the company earned US$5.74 per class B share in the second quarter of 2019, up by 17.8 per cent on prior corresponding period.

Berkshire Hathaway’s Stock Performance Graph (Source: Annual Report 2018)
Warren Buffett’s Retirement Advice

It is a globally accepted belief that retirement planning is a necessary evil, and a chore that everyone needs to perform. Now that we understand Mr Buffett and his company, let us look at the retirement advice that the tycoon swears by:

  • Investing in a very low-cost index fund, wherein the investor does not put all the money at one time, but averages out over a decade, is one of the best ways to plan for a retirement.
  • Investing in good businesses is far better option, than having cash, which, as per Mr Buffett, would get worthless over time. Moreover, instead of focusing on the short term, one should concentrate on investing for the long term.
  • Investors should ideally secure their social security bonuses.
  • Short term government bond funds should be considered for safety and consistency of income. It should be noted that in a situation of a financial crisis hitting the markets, bond funds tend to suffer way less than stock-market funds.
  • One should avoid paying both fund fees as well as fees to a financial advisor, as these fees add up faster. This is when investing in lower-cost funds with low fees would be beneficial as they help in saving up on fees. Simply put, cutting investment costs and reducing management fees or commissions charged by financial advisors should be every to-be retiree’s motive.
  • Mr Buffett is a huge believer in the concept of simple to understand and low-cost investing, and believes in having a tailored retirement plan, rather than getting entangled in the complexities of the market.
Why Are Index Funds suited for Retirement?

Mr Buffett believes that consistently investing in a low-cost index fund makes the most sense practically at all times. Index funds, a form of passive investing, hold every stock in an index, including big companies, and offer low turnover rates, which consequently means that fees and taxes charged to them are always on the lower side.

Mr Buffett suggests that one should keep buying these funds, irrespective of the market conditions, as business is dynamic, and one should not lose out on time if a temporary crisis arises. His inclination towards index fund arises as these funds are a great way to avoid the risk of picking individual stocks. Moreover, these funds have the tendency to accumulate brownie points when it comes to saving on fees and charges, which are cumulative expenses.

Breaking down the concept further, the trick of trade is not to pick the right company but buy all the big players (through S&P 500, for example), and consistently apply this practice to build a portfolio of very low-cost funds, because as Mr Buffett says- Costs really matter in investments.

Index Funds on ASX

Closer to home, let us look at a couple of index funds which one can consider investing in and which are listed and trading on the Australian Securities Exchange:

Vanguard Australian Shares Index ETF

The Vanguard Group Inc, founded in 1975, is one of the world’s largest and most experienced indexing specialists, with offices in London, United States, Tokyo, Australia and Singapore, to name a few. In the Australian context and as of 30 June 2019, it has total assets under management worth of A$7.9 trillion.

As on 25 September 2019, the ASX: VAS stock last traded at A$86.050, down by 0.612 per cent with a market cap of A$4.14 billion and 47.84 million shares outstanding. The YTD return of the stock is 23.23 per cent.

iShares S&P 500 ETF

Incepted in 2000, BlackRock Investment Management (Australia) Limited is the responsible Entity for the iShares S&P 500 ETF. The company has exposure to huge, well-established U.S. players and provides low-cost, tax efficient access to 500 of the largest companies in US by market capitalization.

As on 25 September 2019, the ASX: IVV stock last traded at A$441.290, down by 1.14 per cent with a market cap of A$3.29 billion and 7.36 million shares outstanding. The YTD return of the stock is 24.84 per cent.

One should understand that there are no guarantees in the stock market, but Mr Buffett has the conviction that index funds are perhaps the smartest of investments.


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