Warren Buffett is to investing what Michael Jordan is to basketball with one twist, Buffett hasn’t retired. For those of you finding yourself confused and humming “Margaritaville,” here’s Buffett’s bio. I could write for hours on this blog about why I prefer certain investment strategies over others or why I’m a huge “Random Walk” fan, but at the end of the day it is much better to hear from someone who has mastered their craft.

Last month Buffett talked to a group of students from UT Austin and Emory about investing, life, leadership and other topics. What can I say, the man is incredible. I remember first being introduced to him in my Personal Finance class by my professor Lt Col Steve Fraser and his partner in crime Lt Col Jim Parco (at the time just lowly Majors). They would annually take the class to the Berkshire Hathaway shareholder’s meeting in Omaha, NE…or as they liked to refer to it, “Woodstock for Investors.”

Since that class I have always kept an eye and ear open to anything coming from Buffett so today I share some of my favorite pieces from his recent Q&A session, the full transcript is here:

On diversification:

I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.

On happiness and love:

I won the ovarian lottery the day I was born and so did all of you. We’re all successful, intelligent, educated. To focus on what you don’t have is a terrible mistake. With the gifts all of us have, if you are unhappy, it’s your own fault.

I know a woman in her 80’s, a Polish Jew woman forced into a concentration camp with her family but not all of them came out. She says, “I am slow to make friends because when I look at people, I have one question in mind; would they hide me?”

The most powerful force in the world is unconditional love. To horde it is a terrible mistake in life. The more you try to give it away, the more you get it back. At an individual level, it’s important to make sure that for the people that count to you, you count to them.

On humility and personal influences:

I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. One of your most important jobs in life will be raising your children. They will learn more from you than they will in graduate school. My father was a huge influence, and later on Graham came along. I was also never let down by my heroes.

On the current credit crisis and economy:

What we are seeing is a huge repricing and evaluation of risk, correcting for problems of the past. I don’t know of good credit propositions that are going unfulfilled. There’s lots of cheap credit for sensible deals, which I don’t define as anything that happened over the last 12, 18 months. A lot of things that didn’t make sense are being washed out of the system. It is painful for bad decisions. Comparatively, this is not a credit crunch. In 1982 the prime rate was 22% and money was very expensive. In the late 60’s, we made a sound deal there wasn’t any money to be had. That’s not the case now. The Fed has opened the window, and rates are down. It doesn’t mean there won’t be a major recession.

On individual investors finding opportunities in a market dominated by institutions and hedge funds:

Markets are efficient most of the time about most things. But for these opportunities, nobody will tell you about them. They won’t be on CNBC and they won’t be in brokerage reports. You have to go find them yourself. In 1951, after I graduated from school, I used Moody’s and S&P manuals as my sources of information. I went through them page by page. I was like a basketball coach looking for 7-footers. I still have to find out if he’s coordinated, and can stay in school. But if someone comes up to me that’s 5’6” and says, “Wait ‘til you see me handle the ball”, I say “No thanks”. On page 1443 of Moody’s, I found Western Insurance Securities. It had earned $21.66 per share 2 years ago, and earned $29.09 last year. Over the past year the stock was selling for between $3 and $13 per share. I still had to do the work to make sure the earnings were valid. The markets will get it right eventually. But they are there. You don’t have to find too many. Finding 10 of these opportunities in your lifetime will make you so rich. But you can’t be wrong. You can’t have any zeroes. A list of big numbers multiplied by zero will equal zero. You can’t go back to “Go”.

On picking the top contemporary investors:

I know guys who can make 50% a year with $5 million, but not with $1 billion. The problem with guys that do well is they attract so much money that it neutralizes their advantage. It’s hard to identify them, and even harder to make a deal to keep them from attracting other capital. It’s like betting on a 12 year old horse that won at 3 years old. It’s also important to avoid managers who use leverage. It’s the reason that investors with 160 IQs flame out.

On positioning yourself to deserve success:

Keeping score is terrible in marriage and terrible in business. I put myself in the seller’s shoes. With most humans there is a great desire to reciprocate. If you do something for them, they will do 2X for you. How rare is it to work during lunch hours and be the first one there in the morning. You’ll get noticed if you do something extra. It’s good to have a willingness to pitch in when you aren’t going to get credit for it.

On corporate tax rates and national debt:

Relative to GDP, government taxation is 18.5% and spending is 20%, so we borrow the balance. The national debt should not be a scary topic and the fact that it’s gone up is fine as long as it’s proportional to GDP. Where do we get that 18.5%? There’s 2.7 trillion in government revenues. 2.2 trillion comes from individuals, and less than 1% of that comes from the estate tax. 1.1 trillion comes from income taxes, with payroll taxes consisting of 900 billion, but it’s capped at the first $100,000 of salary. We want a tax system that encourages greater prosperity, but it needs to take care of the family.

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Here are the links to my latest guest posts: Why You Need Community to Reach Your Goals on Alex Blackwell’s blog, the Next 45 Years. AND “What an All-You-Can-Eat Buffet Can Teach You About Investing” on The Dividend Guy. Just happened to come out on the same day. Enjoy!

Due to my love for finance and my ability to throw out the random buzzwords like “asset allocation” and “diversification” to sound really smart, many of my friends have begun to come to me for investment advice. “Cameron,” they ask, “this investing stuff is just too complicated, I am (insert an age) and still haven’t invested in anything, I don’t even know where to start.” The first question I always ask is whether or not they have a Roth IRA? Judging by some of the responses I have received I think it’s time to explain what a Roth IRA really is and why if you are young (college, twenty-something) and you don’t have one, you are throwing piles of cash down the toilet.

IRA stands for Individual Retirement Account, basically a simple way of saving money for retirement — remember though, it is just an account, not an investment itself. With an IRA you can choose where you want to invest your money. Think of an IRA as a basket in which you can throw various kinds of investments. Most people choose to throw a mutual fund in their IRA which is why you will hear the terms getting thrown around and mixed-up most of the time. As long as you remember that an IRA is simply an account to place investments in, you’ll avoid a lot of confusion.

Traditional Vs. Roth - These are the two main types of IRAs. I will save you the trouble right now and tell you that if you are under the age of 50 and you don’t make six figures then Roth is the way for you to go. The main difference between traditional and Roth IRAs are how you are taxed. With a traditional IRA you get a tax break when you deposit the money in your account each year. This means if you make $50,000 of taxable income in a year and place $3,000 in your IRA you will only pay taxes on $47,000 that year. Your money will then grow and when you take the money out after age 59-1/2 you will then pay taxes on the money in your IRA. A Roth IRA is different because while you get no tax break up front, your money grows tax-free in your account and when you take it out come retirement time, YOU PAY NO TAXES, not even on the earnings. Another way of saying it, traditional IRAs are “tax-deferred” and Roth IRAs are “tax-exempt” savings. American Funds has a great comparison chart comparing the two types.

Some Rules to Know - First, being that it is a retirement account you will be heavily penalized if you take the money out early, meaning before age 59-1/2 (there are a few exceptions like a first-time home purchase). This means put money in your IRA that you won’t need in the near term.

Second, for you overachievers, the maximum contribution has just changed from $4,000 per year in 2007 to $5,000 per year in 2008.

Finally, to be eligible for a Roth IRA you must make less than $101,000 as a single filer or $159,000 as a joint filer in 2008. So, if you’re raking in some good money already and you exceed these limits you will only be able to invest in a traditional IRA, still not a bad thing.

How to Set Up a Roth IRA - First, remember that banks and investment companies want your money, so they’re going to make it as easy as possible for you to give it to them and if they don’t, shop somewhere else. All you need to set up your account is your W-2 form showing you have earned income. There are a few different places you can go to set up your Roth IRA: bank/credit union, mutual fund companies, or discount broker. The bank route would be for the ultra-conservative investor that wants to use CD’s or money market accounts as their investments (if you’re under the age of 50 this is probably too conservative).

Next would be opening it through a mutual fund company. My favorites include: Vanguard, American Funds, USAA (All of these links will take you to the page dealing with opening an account with the company). By going through a mutual fund company you can then purchase shares in one or multiple funds from the company and put them in your Roth IRA. This method also helps ensure greater diversity being that with a mutual fund you are automatically investing in hundreds of companies rather than just one or two, spreading out your risk substantially. Plus, many times the minimum investment is lower when opening a retirement account than it would be with a normal brokerage account. The final avenue would be using a discount brokerage service, similar concept as above.

Once you have opened your account the next step is setting up an automatic investment plan (takes out money from your paycheck and automatically puts in your investments) so you can harness the power of dollar cost averaging (DCA), an investment principle I wrote on earlier The World’s Easiest Guide to Understanding Retirement Accounts - Ramit Sethi (the man)
- Why You Need a Roth IRA - Kiplinger.com
- Roth IRAs: A better IRA for almost everyone - AmericanFunds.com