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#004 – Warren Buffett’s Warnings To Investors And How To Protect Your Retirement

JUNE 11, 2020

I’m sure if you and I were sitting across from each other sipping on our coffee we would look at each other and say: “WOW! What in the world has happened since the last time we talked? Has the earth stopped spinning on its axis? Has the north pole shifted to the south pole? Or have we been invaded by aliens?” It would have had to have taken something mind-blowing to cause every economy in the world to come to a standstill. They say life is stranger than fiction — but if this was a movie none of us would believe it could truly happen. But it has! We’re going to be discussing Warren Buffett’s reaction and see how he is handling his investments during this unbelievable time. Now, most of you know who Warren Buffett is, but if you don’t, he is regarded as one — if not the best — investor of our generation. Each year, Warren Buffett holds his Berkshire Hathaway’s Annual Shareholder Meeting where he discusses the previous year and lays out what he’s seeing and expecting for the year and years ahead. This has traditionally become a very big event because Warren Buffett is known as one of the greatest investors of our generation, and this event gives us a glimpse into his mind and allows us to see what he’s thinking or planning for the future. Many people on Wall Street — and Main Street — take his advice like it was given from the gods, and, more times than not, has been proven correct. But we must remember he’s just a man, and nobody knows exactly how this is going to turn out. Although, he does make some pretty convincing arguments for what lies ahead. I have gone through the transcripts and watched many videos on this year’s talk, and will provide my interpretation of what he’s telling us. This is not a recommendation to buy or sell any stocks, bonds or annuities. It’s just me using my 30 years of being a financial advisor trying to interpret and then pass along the words of wisdom from Warren Buffett. Warren Buffett and Berkshire Hathaway’s Annual Meeting this year was a rather somber and subdued event. And I think that could prove to be very telling in the months ahead. Warren Buffett is approaching 90 years of age but his stamina and clarity of thinking is still amazing. Yet, listening to him, I felt like he was trying to tell us: “Be prepared. Things in the stock market are going to be a little tough going forward.” His bet on America is still intact, and I would bet he’ll always say that. But you could see that he is somewhat fearful and he’s hoarding cash. I went over the transcripts a few times and he made certain to really drive home some important points. To me, it seemed like he was trying to warn us or trying to point out some insights that he wanted to make sure that we didn’t miss. Here is my take on what he was trying to tell us: — My 1st takeaway: He does not think stocks are attractively priced right now. His last purchase was back in 2016 and his cash on hand is now more than five times what he needs for working capital. In fact, it makes up 41% of Berkshire Hathaway’s portfolio. He states: “We have not done anything (meaning made new stock purchases) because we do not see anything that’s attractive to do.” He references the importance of his cash stockpile multiple times, for both its value when potential investment opportunities will arise and to protect him if something really bad happens in the market or the economy. — My 2nd takeaway: It appears he cannot flat out say how bearish he really feels about the market. That’s because he knows that the market may tank on his words the very next day. And, it would go against his long-term view of bet on America or nothing can stop America when you get right down to it. — My 3rd takeaway is that he feels what’s coming next is really unknowable and hard to gauge. He said: “You can bet on America, but you’re going to have to be careful about how you bet, because markets can do anything.” He repeatedly said: “Nobody knows what’s going to happen in the next few years, and anything can happen.” He seems to be saying this from a position of concern, not from his usual, “Nobody can predict the future, so just buy stocks for the long-term and you’ll be fine.” — My 4th takeaway: He made it very clear that his timeframe for doing well in stocks was decades. In reference to owning stocks, he said: “If you bet on America and sustain that position for years you’re going to do better, far better in my view, than owning treasuries.”* Well, that doesn’t sound too surprising or much of a revelation, since the 10-year Treasury is currently yielding less than 1%. What he said next was even more telling. He said, regarding buying stocks, he thinks that you can buy a cross-section of different stocks and do fine over the next 20 to 30 years. But here’s what’s really telling. Notice: he did NOT say over the next 5 or 10 years. Yes, he’s always preached investing for the long-term. But I sensed that, at this meeting, he was trying to set expectations much lower. It seemed that he has low expectations for stock returns in the short to medium-term, meaning the next 5 to 10 to possibly even 15 years. Warren went on to reveal that, year-to-date, Berkshire Hathaway has been a net seller of stocks, not a purchaser. Now, we all know what happened in the stock market this year from February 19th to March 23rd, the S&P dropped 35%. Now it’s rebounded a fair amount of that loss. But what is interesting — and maybe more important — in telling of the future is that, although we had lost 35%, Warren Buffett was doing nothing and did no purchasing of new stock position. He did no buying. In fact, Warren went on to talk more about his cash position and why it was so large. He went on to share that 41% of Berkshire’s portfolio is in cash, leaving only 59% invested in the market. The next question is to ask: Why did Warren Buffett not take advantage of the 35% market decline? Well, one reason — he mentions — is before deploying cash to buy stocks, his first step is to ensure that Berkshire Hathaway remains a financial fortress. In other words, making sure that he has enough cash on hand to meet its needs. So that he wouldn’t be forced into selling stocks to raise cash during bad times or poor market conditions. Warren goes on to say that they are keeping a large position in cash because the future is unknown. The recession or downturn could last a lot longer than some people expect, and he wants to have enough cash to survive. He goes on to state another reason he has a large amount in cash, and that is he hasn’t really found any great buying opportunities. He doesn’t mean there haven’t been some opportunities, but Warren doesn’t see any current opportunities for Berkshire Hathaway. This would lead me to conclude that, if one of the world’s best investors has not found the opportunity or feels it’s better not to put new money into the market, then maybe I, too, should be somewhat conservative. As I finished listening to his talk, it seemed that you could summarize what he was telling us in this: yes, America and the stock market will be fine, and you can bet on America. But the tough times are not over, and no one knows how long it will last. And yes, you can invest in the stock market, but make sure your time horizon for good returns is 20 to 30 years. Above that, make sure you have enough cash — or income coming in — to sustain yourself. Cash or income should be looked at first before you put more money into stocks. Warren Buffett is famous for his two rules of investing:
  • Rule #1: Never lose money, and
  • Rule #2: Never forget rule #1
The key thing to remember about Warren Buffett is he’s an investor, not a speculator. Investors look at the long-term returns of stocks and really only buy when there’s perceived value. So, how can we be more like Warren Buffett and less like ourselves when it comes to investing our hard-earned retirement dollars? First, these hard-earned and saved retirement dollars of yours, they’re not easily replaceable. They’re the only retirement savings you have in the world and if they’re lost you can’t just run out and get another batch. Your retirement savings represents 20 to 30 years of savings and contributing to your 401(k) or other retirement plans. You’ve placed a priority in growing it and protecting it. Now you need to make sure it’s fully intact when you retire and make sure it lasts as long as you do. When investing our retirement dollars, we need to keep Warren Buffett’s two rules in front of our mind:
  • Rule #1: Don’t lose your retirement money, and
  • Rule #2: Don’t forget rule #1
Each year that passes you are one year closer to losing your current paycheck or having no other pools of capital to draw from. Your retirement funds must support you — and your spouse — for life. You will be moving from what is known as the “accumulation phase” to the “distribution phase.” From contributing to withdrawing. Imagine how you would feel if you were retired in 1999 or 2007 and the very next year your money was cut in half just as you were beginning to withdraw serious money for your retirement income. Would your confidence, about retirement, take a hit? Whether it was 1999 or 2007, little did you know — or did anyone know — that we were one year away from suffering a 50% loss in the market. True, the markets can eventually come back, but the law of mathematics has not been repealed. If, before the crash, you were withdrawing 4% annually, let’s say on a $1,000,000 nest egg, which would give you about $40,000 of income or a little over $3,000 a month, and this type of correction hits — which has now become kind of normal — you’d suddenly be withdrawing at a clip of 8% from your new total of $500,000. If you wanted to get the same amount of income — even with the market recovery — try putting a pencil to paper and taking out 8% of your remaining money, every year after a 50% decline, and you won’t like the results. On Wall Street, this is known as a “withdrawal death spiral” for retirement accounts. Now, if you live on Social Security alone…no problem, don’t worry, be happy; but if you’re like many retirees — or retired baby boomers — life has gotten expensive, and you have no intention of lowering your living standards when work stops. I’ve been helping people plan for their retirements for the last 30 years, and I found that spending does not decline, at least for the first 10 or 15 years of retirement. There are lots of things on your bucket list that you want to experience and accomplish now that you’re retired. It’s not out of the norm for retiring engineers, teachers, and other professionals, to spend between $80,000 to $120,000 a year to support their lifestyle. Now, let’s assume that it takes $100,000 and take that x30 years…that’s reality. Now, if you have the ability to potentially cover that for sure, you don’t want to risk losing half of it to another market downturn. So, with Warren Buffett telling us that he’s uncertain about the future…what are we to do now? If you’re relying on stock market-based assets alone to drive your income, here are a few tips: First, be an investor, not a speculator; meaning that, if you’re going to invest in the stock market, remember it’s stocks for the long run, you’re buying those stocks to be used 10 or 15 years down the line. Stocks should not be purchased — and systematically sold off — to produce income during the first 10 years. Relying on the price of stocks in the near term — either next month, next year, or even 5 years from now — is very unpredictable, and you don’t want to be withdrawing money from stocks when they’re on an extended downturn. So, what is a smart investor approaching retirement — or someone already retired — to do? I’m glad you asked. Because I’m here to spread the word — loud and clear — to every baby boomer who will listen. Because in my opinion, every baby boomer who hears these words and puts them into action will have the best opportunity to avoid disaster and live a successful and happy, and confident, retirement. O.K., here it is: Separate your precious — and most likely non-replaceable — retirement money into categories, or buckets. One bucket would be emergency money, which would be cash, savings accounts, CDs, something you could get your hands on quickly if needed. This should cover 3 to 6 months worth of living expenses. The second bucket should be some form — most likely, multiple forms — of guaranteed income. You want something that produces a guaranteed reliable income that shows up in your bank account on the first of every month, regardless of market conditions or a good or poor economy. You want this guaranteed income to be enough to cover your core living expenses. One of these sources is, of course, Social Security. A second one can be a pension, if you’re lucky enough to have one. Now, Social Security is great but, for most retirees, it is not enough to cover all of their core living expenses. Remember, you want this amount of guaranteed income to be enough to cover your core monthly living expenses. Think of MUG, like coffee mug. MUG is an acronym: M for mortgage, U for utilities, and G for groceries. Think of it as a base level, or a floor of income, to cover your MUG. If you have your core living expenses — your MUG — covered with guaranteed income, believe me, your retirement will be much happier and much less stressful. I’ve had people tell me: “Yes, I think I would like those, but I heard if you pass away early the insurance company keeps your money.” Well, I’m here to tell you that, no, that is not the case. Are there a few that are set up that way? Yes, but 95% of all annuities now are not set up that way. Any money left over goes to your beneficiaries, the people you choose. Ok, once your guaranteed income, or MUG, is covered, then you can work on bucket three. This bucket is where equities fit. This is money you don’t need for your core living expenses but can be used to cover future cost of living increases, or the extra things on your bucket list, like the trip to Italy, or a cruise for the family. But like Warren Buffett says, this is the money that is not really needed for the next 5, 10 or even 15 years into the future. The reason for splitting your retirement money into three different buckets is to have a specific purpose and goal for each bucket. By doing this, you are not tying your income in retirement to the ups and downs of the market or the economy. Think about the happiest people you know in retirement. It’s not always the richest people or the ones that have the most money in the stock market. No, many times, the people who have the most money in the stock market are the ones that are concerned or worried about the market’s daily gyrations. No, the happiest people in retirement are the ones that have a guaranteed source of income coming in every month, regardless of the ups and downs of the economy or the market. The happiest retirees are the ones that can spend their full amount of guaranteed income each month as it comes in, because they know more is guaranteed to come in next month, and the next month, and the next months after that. The people who set this up correctly never have to live a “just-in-case retirement.” What’s a “just-in-case retirement”? It’s people who don’t spend much of their retirement money because it’s not guaranteed for life, and they fear that if they spend it now and the market goes down then they won’t have it next month, so they won’t spend now just in case it goes down next month. That’s not the way you want to live your retirement. And, guess what? You don’t have to, there’s a better way. So, the market has rebounded off the lows, and you have now heard Warren Buffett’s concerns about the stock market for the foreseeable future. Maybe this is your time to secure your retirement. Set aside an emergency account. Build a guaranteed income that covers your core living expenses. Then, you can invest a portion into the market to cover the cost of living increases, or do the extra things on the bucket list. I believe you will live a much happier retirement if you set your retirement plan up this way. Though, I can’t absolutely guarantee happiness, because as Abraham Lincoln was quoted as saying “Everyone in life is about as happy as they choose to be.” So, I can’t guarantee a happy retirement if you set things up this way, but I do have many, many case studies of people who have said “Thank you, thank you, thank you for helping me set up my retirement accounts this way so I have a guaranteed income for life that is not tied to the market. I live a much happier and stress-free retirement because of it.” If this makes sense to you, reach out and talk with us. Reach out to us at There’s a big button for questions on the top of the right-hand side. Our goal at “Let’s Talk Retirement” is to help you enjoy your retirement more, and worry less about your finances or the market. Thanks for tuning in, until next time! Listen to the episode on Apple Podcast, Google Podcast, Spotify, Stitcher, or on your favorite podcast platform.           * Source: The 2020 Berkshire Hathaway Annual Shareholders Meeting. May 2, 2020. Why I Left Wall Street Big Banks to Safeguard People’s Retirement
1 Comment
  • Eric King
    4:00 PM, 3 August 2023

    Fià aRe theeee Bomb! NO caps rock!

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