Warren Buffett: Why stocks beat gold and bonds

The following post considers a recent article by Warren Buffett. This article is the opinion of Mr. Buffett alone, and does not represent the opinions of GoalMine, nor should it be construed as investment advice.

Warren Buffett recently published an adapted excerpt of his annual shareholder letter that has people talking. In it, he makes the case that stocks almost always beat other investment alternatives over time. He divides investment opportunities into three categories:

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Plant once and reap in perpetuity

If you go through our blog posts, you’ll find that we rarely talk about specific investments here. One reason for that is that, in general, being a successful investor has very little to do any particular investment. In fact, it is almost wholly about understanding how to invest properly, and then following through with consistency.

Anybody who has established strong habits–good or bad–knows the tremendous power they carry with them. Many people are zealous about their daily walk or run. Other people like to check their email first thing in the morning, or read a book every evening when they get home. If you have a strong habit, think about how much effort you have to exert to slip into that habit: chances are, the answer is “almost none.” That’s because the decision making is already done. You don’t have to make up your mind anymore. You just execute automatically.

But the sad fact is that many of us just don’t get around to forming the same kinds of financial habits. We rely on our best intentions and a hundred day-to-day decisions to come together for our financial good.
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Jargon Buster: Fixed Income

Fixed income securities are a type of financial instrument that pays out a stable, or ‘fixed’ amount over the life of the instrument. If you buy a bond, or loan money to a friend, and they pay you back the same amount every month, that would be an example of a fixed income instrument.

While these types of products can sometimes be guaranteed by banks backed by the FDIC, or by insurance companies, you can also buy fixed income products that might be at risk of loss. Those that have the risk of loss often pay higher amounts to compensate you for the added risk. Fixed income products are often used by people that want predictable income, like retirees.

If you’d like to learn about how bonds and other fixed income securities differ from stocks, check out this Investing U article.

 

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5 Great Investing Quotes

A little inspiration goes a long way, so we dug up a few of our favorite investing quotes to get your investing juices flowing for the year ahead.
 

1. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

- Warren Buffett
 

2. “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

- Robert Kiyosaki
 

3. “You have to learn that there’s a company behind every stock and there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.”

– Peter Lynch
 


4. “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

-Paul Samuelson
 

5. “The four most dangerous words in investing are: ‘this time it’s different.’”

- Sir John Templeton
 

And one bonus quote just for the fun of it:
 

“If I’d only followed CNBC’s advice, I’d have a million dollars today. Provided I’d started with a hundred million dollars.”

- Jon Stewart

 
Images via tornatore, Robin Stott

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Don’t Let Anchors Drag You Down

Here at GoalMine, we are devotees of value investing, the philosophy that one should seek out investments that are trading for less than their intrinsic value. Basically, value investing argues that eventually, “truth will out”, and the true value of an investment will be reflected in its stock price and/or dividends paid. It’s a philosophy that requires patience and a willingness to stick through the tough times, as this price adjustment can sometimes take a while in coming.

“But shouldn’t the markets already take all available information into account?”, you ask, “Shouldn’t they prevent any investment from trading at an incorrect price for any reasonable length of time?” Believe me, I’ve asked that same question. The problem is that pricing an asset is effectively an exercise in predicting the future–and nobody is all that good at predicting the future.

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Jargon Buster: FDIC

FDIC stands for Federal Deposit Insurance Corporation. The FDIC, a US government organization, was created in 1933 in response to the Great Depression, and was designed to help create a more stable banking system. The purpose of the organization is to provide insurance protection to depositors in the case of a bank failure. Banks pay into the insurance fund to cover losses when they arise.

Deposits at many banks are FDIC insured. This means that, up to the legal limit (currently $250,000 per depositor per institution), your money is rock solid safe. If a bank should fail, the FDIC, backed by the US government, will ensure that you get your deposits. Mutual Funds and other securities, however, are not bank deposits and are therefore not insured by the FDIC.

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Spend Money on the Things You Value

New Year’s resolutions were on my mind this morning as I read a recent poll about what Americans are willing to give up in order to save money. According to the results, most people were willing to give up things like coffee, eating out, and cable. But there were a couple things people were NOT willing to part with: 53% wouldn’t give up their cell phones, and 32% wouldn’t give up Internet access.

Researchers seemed surprised these numbers were so high, but it makes a lot of sense to me. After all, people rely on their cell phones and the Internet for all sorts of things (in my case, perhaps to an unhealthy degree!), so of course they’re willing to keep spending money on them. And frankly, I don’t think that’s a bad thing.
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Sticking to Your New Year’s Resolutions

Yep–it’s that time of year again. You’ve probably read several financial New Year’s resolutions and maybe even have your own list going in your mind at this point. So rather than add to the cacophony of promises you are making to yourself right now we thought we’d share a few interesting ideas that could help you actually stick to some of those lofty goals you are setting. Here are a few of our favorites:
 

1. Visualize Your Gray Hairs Now

A recent study in the Journal of Marketing Research bears the academic title, “Increasing Saving Behavior through Age-Progressed Renderings of the Future Self”. It basically suggests that if you picture yourself at retirement age, you will better be able to identify with your future self and, as a result, you will be more likely to make sacrifices today for the octogenarian you will become.

Need a little help imagining what you will look like? Check out the Face Transformer at the University of St. Andrews website which will let you upload a photo of youself and transform it into an old person. Then keep the photo next to your desk to remember to put a little money aside for those golden years.
 
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Did you get a gift card you don’t want? Invest it!

Now that this gift-giving season is coming to a close, you may find yourself with various gift cards on hand.

If you’re not sure what to do with them, why not deposit the cash into your GoalMine account? Until the end of January, we’re letting you trade in your gift cards for cash. In fact, if you’re a new customer, we’ll even pay you 150% of the face value of your first card. Read more about it, or check it out directly!

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Should Auld Investments Be Forgot?

fireworksWith New Year’s just around the corner, you may be considering changes you’d like to make in 2012. But what about spending a few minutes thinking about those things you’d like not to change? Here are three financial habits that we’re definitely not changing in 2012:

1. Pick and stick

We’re big believers in the power of compounding returns. But to reap them, you have to get in the game and stay in the game. This is especially true if you, like us, buy into the idea of “value investing”–that is, picking businesses that are trading below their long-term value. To do well with value investing, it’s important to be patient. If you pick a good investment, and stick with it, you’ll be in good shape over the long term. Getting in and out all the time is a very risky proposition, and generally a bad idea for most investors.

As a grade-schooler, I learned a little song that said, “Make new friends, but keep the old: one is silver and the other gold.” I’m not suggesting you buy precious metals (or that you don’t–that’s up to you), but it is worth remembering that there is no reason to jump ship on an investment just because you’ve been holding it for a while.

2. Do it, then do it again, then again and again

Consistency is one of the traits of successful investors. In fact, creating and adhering to an investment plan is one of the best ways to make money over time. Putting money into your investments on a regular schedule–on the same day every month, for example–helps produce the financial discipline necessary to build a substantial portfolio. Furthermore, it allows you to take advantage of dollar cost averaging.

3. Keep learning

There is always more to learn about investing. Not all of the information out there is helpful, or even accurate, but there are many good resources available. We’ve recommended some strong investing blogs before, and have also provided a list of some excellent investing inforgraphics that can provide perspective on market performance and other elements of investing. And, of course, we’d love you to go through the basics of investing with our own Investing U articles.

We hope that the coming year brings you much happiness and success, in investing as in the rest of your life.

Image via mrhayata

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