Be More Like Warren Buffett, Less Like You, When Investing Your Money

Warren Buffett, probably the world’s greatest stock market investor of all time, has said he has one key rule when investing: “Never lose money.” Has the Sage of Omaha ever lost money? Yes. But his losses have been small and infrequent compared with his many large, frequent and long-lasting victories.

His point is to focus on protection, not just growth. Mr. Buffett is what is known as a “value investor.” He buys companies, and their capability to earn money, rather than just looking at their prices.

He is an investor, not a speculator. Investors demand to be paid continuously for owning an asset, focusing less on the price of the stock and more on what will keep coming into the kitty over time. Speculators don’t care about earnings or dividends. They bet on the price, and the price alone. They are short-term technical traders, not long-term value investors. No traders are listed ahead of Warren Buffett on the list of richest Americans (opens in new tab).

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The value investor wants to get paid, even if the price of the stock goes lower. They want the same or better earnings this year than last year. If the market falls, they believe fear will drive demand back to value stocks — companies that make money and pay dividends. The methodology of the value investor is a system: Choose quality companies, get paid dividends to own them, reinvest those dividends and from time to time cull out stocks that no longer fit your model.

So, how can we be more like Warren and less like ourselves when it comes to investing our hard-earned retirement dollars?

First, we need to heed the words “hard-earned” and “retirement.” These are the only retirement savings you have in the world. If they are lost, you can’t just run out and get another batch. Your retirement savings represent 20 or 30 years of saving and contributing. You placed a priority on growing this nest egg and making sure it would be fully intact when you retired. Why would that priority change?

The second important consideration is the word “retirement.” The closer you are to your retirement date, the more you should be paring back risk. A lot can go wrong in a short period. Each year that passes, you are one year closer to losing your current paycheck and having no other pool of capital than your nest egg to support you and your spouse for life.

You will be moving from what is known as the Accumulation Phase to the Income Phase, from contributing to withdrawing. Imagine how you would feel if you retired in 2007 or 1999, and your money got cut in half just as you were beginning to withdraw serious money for lifetime income. Would your confidence take a hit?

In both cases, little did you know that you were a year away from suffering a loss of 50%, or thereabouts.

True, the market can eventually come back. But the laws of mathematics have not been repealed. If, before the crash, you were drawing 4% annually from a $300,000 nest egg to deliver $12,000 a year of income ($1,000 a month), you’d be suddenly withdrawing at a clip of 8% from your new total of $150,000 to get the same income. Even with the market recovering, try putting a pencil to taking out 8% of your remaining money every year after a 50% decline. You won’t like the results.

If you can live on Social Security alone, no problem. March on and worry not, pilgrim. But if you are like many retiring or retired Baby Boomers, life has gotten expensive, and you have no intention of lowering your living standards when work stops. I’ve been planning financial futures for over 21 years and found that spending does not decline after retirement. In fact, in some cases it increases due to more travel as well as gifts to grandkids, church, etc.

It’s not out of the norm for retiring engineers, teachers and other professionals to spend $80,000 to $120,000 a year to support their essentials and lifestyles, including taxes and insurance. Let’s round it to $100,000 gross. Take that times 30 years. Reality: You will need $3 million of income from all sources — without accounting for inflation, non-covered medical, a rise in taxes or a breakdown in Social Security. With inflation, that number could hit $5 million.

What to do now:

If you are relying on market-based assets alone to derive your income from now on, here are some timely tips for you:

1. Be an investor, not a speculator.
2. Diversify your holdings. The market will zig and zag for the rest of your life. There could be one or more “2008s” sitting out there somewhere. For part of your portfolio, you need assets that zig when the market zags – and still keep paying you the same income, even if the market crashes.
3. Separate your precious retirement money into categories or “buckets.” I like using four main buckets: cash (cash equivalents), fixed income, growth and insured outcomes. I like to see my clients enjoy their lives more and worry less about market outcomes.
4. Make sure every one of your dollars makes its way into a bucket, and make sure each bucket has its own specific task and time deadline.
5. In your growth bucket, think like Warren Buffett, not Jimmy the Greek. Be an investor, not a speculator, with most of your money in your growth bucket. A sliver can be directed toward speculation, but only to satisfy an urge.
6. Fall in love with dividends. Over the past 20 to 50 years, the stock market has not averaged 10% unless you calculate in the act of reinvesting dividends. Ignore at your peril.
7. Consider annuities for your insured income bucket. The guarantees of reliable income from the right annuity may give you and your spouse the financial confidence you seek.