Investing Money: Where You Should Invest Your Money

Taking the step into investing can be a nerve wracking experience. With some sound advice and solid research though, it can be the start of ensuring your financial freedom. Scott Pape, Australia’s own Barefoot Investor and media personality lists his best tips for where your money should go. 

Where You Should Invest Your Money

IF you’re worried about where to invest your money, turn off your phone and spend the next six minutes with me. I’ll give you four or five investment ideas that could double your returns over the next 10 years.

The ideas are all lifted from Warren Buffett’s annual Berkshire Hathaway shareholder letter, released last weekend. There are two reasons this 81-year-old has form:

      1. From 1965 to today he’s achieved an increase in book value of 513,055 per cent (which would have grown an initial $10,000 investment into $50 million today).
      2. Unlike the vast majority of financial planners, and spruikers in suits who lunch off your investments, Buffett isn’t trying to sell you anything: he’s plenty rich already.

The clock’s ticking, so let’s get to the good stuff.

The riskiest place to invest today

With Greece spiraling out of control, smart investors are keeping their money in cash, right? Wrong.

Cash is trash, according to Buffett. He points out that inflation has eroded the value of the US dollar by a staggering 86 per cent since he began in 1965. Or put another way, it now takes $7 today to buy what $1 did then.

This means that, between 1965 and today, you would’ve had to earn 4.3 per cent on your cash each year just to maintain your purchasing power – before you made even one extra dollar.

The safest place to invest today

So where’s the safest place to hide from inflation? Boring businesses with a long track record of making money each year.

Once Buffett has invested in a company, he focuses on the profits it generates and pays him each year (the dividends), rather than what someone is willing to pay for the business at an around-the-clock, never-ending auction (the share price).

As an example he points to his four biggest holdings: American Express, Coca-Cola, IBM and Wells Fargo.

Last year his combined earnings for these four was around $3.3 billion, of which a quarter was paid to him in dividends (around $860 million). The difference, $2.4 billion, was retained by the companies and reinvested into growing their businesses.

“A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends will come to us”.

Okay, so let’s do away with the billions and talk turkey – or more precisely a supermarket you can buy one from.

In 1993 Woolworths shares were trading at $2.60, and they paid a 12-cent dividend to shareholders that year. In 2011 Woolworths paid out $1.22 in dividends. Think about that for a second. You’re now receiving a 50 per cent return on your initial investment each year in dividend income. And the share price? It’s increased tenfold.

10,000 shares in Woolworths

1993

Market value: $26,000
Annual dividend paid: $1,200

2011

Market value: $260,000
Annual dividend paid: $12,200

That’s why Buffett says: “Over any extended period of time investing will be the runaway winner … More important, it will be by far the safest.”

The most overvalued investment today

If gold were a rockstar it would be Lady GaGa, it’s so hot right now.

As fear of financial catastrophe intensifies, so does the demand for gold. As the price rises, you need to find a greater fool than you to buy it at a higher price. That’s how investment bubbles grow.

If you took all the gold in the world (around 170,000 tons) and melted it, it would form a cube with 20-metre sides, worth around $9.6 trillion at current prices.

Yet Buffett argues that for the same money you could buy all the farmland in the US (400 million acres), plus sixteen ExxonMobils (the world’s most profitable company), and still have $1 trillion left.

“A century from now”, says Buffett, “the farmland would have produced staggering amounts of corn, cotton and wheat. ExxonMobil will probably have delivered trillions of dollars in dividends … The 170,000 tons of gold will be unchanged in size and incapable of producing anything.”

The most undervalued investment today

Buffett’s annual letter can help all investors, but it’s designed to help what he calls his ‘partners’. If you’re an investor in Berkshire Hathaway, you’re a partner, and he’s giving you all the information that he would want if the roles were reversed.

And here’s the clanger: one of the most undervalued assets Buffett has been buying lately is own company. He instituted a buy-back of Berkshire Hathaway shares because he believed they were undervalued. One of his directors said this was “like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping”.

How one man applied the principles – and you can too

I know what you’re thinking. Reading Buffett’s investing principles is like watching Tiger Woods take a swing and then expecting to hit a hole-in-one yourself.

So let me tell you about Walter Schloss, an average bloke with no college education who amassed a fortune over his lifetime.

Early in his career he actually shared an office with Buffett when the two worked for legendary value investor Benjamin Graham, but he was never seen as having Buffett’s brilliance. Still he had gained a solid understanding of value-based investing – buying good-quality businesses with consistent earnings that had fallen in price.

In 1955 Schloss left the firm and set up shop in a little apartment with no staff, no fancy technology and no contact with Wall Street.

He then followed a simple strategy to build his wealth:

He scoured the 52-week low charts in the newspaper looking for unloved companies that were trading below their net assets, so as to ensure that he had a margin of safety if things went wrong.

“I don’t like to lose money and so if I buy them cheap enough I’m effectively protected on the downside … and the upside takes care of itself” he explained.

Walter Schloss stayed in that little apartment for well over four decades until retiring in 2000, and over that time achieved a 16 per cent compound annual return (which would have turned a one-off $10,000 investment into $7 million).

He died last week at the grand age of 95. Like Buffett, Schloss lived a frugal life, backed his own judgment, and displayed incredible integrity – all of which put him at odds with the new breed of self-interested, short-term money managers.

I’ll leave the last word to Buffett: “I’ve long felt the only value of stock forecasters is to make fortune-tellers look good. [I believe] short-term market forecasts are poison and should be locked up in a safe place away from children and also from grown-ups who behave in the market like children.”

Tread Your Own Path!

Even Sir Richard Branson is a fan of Australia’s Barefoot Investor Scott Pape! Scott is a blogger, author and media personality who prides himself on providing solid, no nonsense or gimmicks investment advice. You can read more about him at his website. 

What are some of your tips for people entering the stock market for the first time?