If Warren Buffett Was A Millennial…

If Warren Buffett had an ounce of typical Millennial in him, he sure as hell wouldn't be a billionaire and the most successful investor on earth.

Why? Because Warren Buffett takes risks. Warren Buffett is okay with losing money every now and then. Warren Buffett made a conscious effort to surround himself with smart people. Warren Buffett didn't walk around with his hand out, waiting for every "deserved" opportunity to fall in his lap. And Warren Buffett invested with his head, not his heart.

Millennial Issues

I'm a Millennial myself and I'm confused by my own generation when it comes to these ideas. As this blog's readership continues to expand, I get more emails and people tend to ask me things about investing as if I were some sort of expert. (I'm not—there's a difference between enthusiasm and expertise).

I love a great email question, blog comment, or in-person conversation! I'm not going to tell you how to invest, or what decision to make, but sometimes it helps to toss ideas out there and share thoughts on different subjects. Hopefully it starts your cognitive motor, gets you into gear, and you make a prudent decision on your own. Often I learn as much as you do from these interactions.

One thing that I'm noticing from my own generation is this insane aversion to what made Warren Buffett so successful. I see Millennials in a total investment freeze because they can't decide between a Balanced or Assertive spud portfolio; as if it's going to make a difference on their $5,000 investment account.

They ask if Bitcoin should be part of their portfolio (everyone else is doing it). They're afraid to invest at all-time highs (stocks could crash). The humming and hawing about pot stocks (it's going to be legal).

If you're 25 years old and have impressively avoided spending every last nickel on phone data, avocados, and gasoline to get to a pipeline protest, it is time to use your head and take a damn plunge on something half-smart.

Make a decision, take a risk, possibly lose some money, learn from smart people, and carve out your own future instead of expecting the government or your mom to look after you. Yes, it's alright to lose some money; as long as you learn from every mistake and get progressively better, loss can be a good thing.

Say you're starting out and invest every last dollar to your name on stocks. Who cares if the market drops 50%? We're probably talking about a couple thousand bucks anyways. It makes no difference in the long run. You just save a little more aggressively, buy that loss back, and keep digging. Simply learn to make a decision and learn from your mistakes.

Just learning these are great skills: opening a brokerage account, putting in buy and sell limit orders for ETFs, seeing your account go up and on good months and down on bad ones. It's all fun and games.

That's right, investing is a big game. It's an important one, sure. But it's still a game. It involves strategy, risks, perpetual learning, and the occasional mistake. It's much better to learn the game with $10,000 at 23 years old than $500,000 when you're fifty and only have a few years left before traditional retirement.

It's also much better to learn money management on your own while you're young than to depend on an old suit to hold your hand for 1% or more each year. There's nothing wrong with paying a smart gal for some advice, but don't overpay just because you are scared to do something yourself. Self-directed investing and personal finance knowledge are valuable; even just 1% is a large chunk of money to pay for advice if you have a $2 million portfolio.

Chances are if you learn a few things with a couple grand in your early twenties, you will have a lot more money when you are fifty. Maybe you won't need to work for the man when you're fifty. Maybe the spoon-fed and shaky government old age handout scheme is irrelevant to your well-being in your senior years. Isn't that a crazy idea!

The Buffetts of the World

The world is full of Warren Buffetts that dominated the generations before ours. Buffett is just an example. You've got Charlie Munger of Berkshire, Jeff Bezos of Amazon, the nerdy guys from Google, Bill Gates, Jimmy Pattison, etc. The list of these self-made billionaires goes on.

These older generations can teach us Millennials a few things, if we're willing to learn and act.

Warren Buffett left his mom's basement in Omaha and moved to New York to find a great mentor in Ben Graham—the father of value investing. He then folded an investment partnership that made him multi-millionaire in his thirties, instead taking a chance on the insurance business. He wisely saw an opportunity to capitalize on insurance float money for free investment funding and better tax efficiency than was available to him otherwise.

Charlie Munger left Omaha, joined the military, went to law school, became a real estate investor, and committed himself to perpetual learning. This eventually made him a stock investing billionaire and one of the smartest guys on the planet. Charlie is rich because he understands human nature better than nearly anyone. (Listen to him on Youtube).

Jeff Bezos left a lucrative Wall Street tech job to start a company from his garage that sold books online. This little venture is Amazon, one of the most diverse web companies in the world. He takes calculated chances every day on tech gadgets, sales promotion schemes, shipping innovation, and so on.

Bill Gates left Harvard to start a tiny little programming company. Thanks to a little programming talent, a few bold risks, and a lot of legal prowess, deal after deal resulted in what is Microsoft today. Thanks pretty much to creating that little licensing agreement box that you click "I Agree" on every time you install some software, Gates turned Microsoft into a software giant which earns billions in profits each year.

Look at everyone that's successful and you will find the same patterns. They take risks; they accept the idea of loss; they learn from every mistake; they think independently; and most important they spot and pursue opportunities.

If you see an opportunity, think through the possibilities, be objective, and, if things line up, formulate a plan and commit to the plunge! It's easier to take these opportunities if you still live at home, have saved some money, and are young and have a long timeline.

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I Like Gold; You Should Too

Since I started The Rich Moose, I have been positive about gold. I've included gold miners in a simple model portfolio. I believe gold (and silver) are great protection assets because history tells us they are.

We are at a weird point in history in currency terms. Never before has the entire world been transacting primarily with fiat currencies—money not backed by any hard assets. But that doesn't mean fiat currencies are new, it has been tried and failed many times before.

Save for a few blips of excitement, gold and silver have been largely an afterthought since the 1970's. Precious metals as an investment have been heavily criticized in recent years, just as they were in the 1990s and early 2000s.

Why not buy bonds that pay interest, or safe stocks that actually rise in value? Isn't it safer to be in bank stocks that have paid dividends for over a hundred years than to invest in a gold miner? Even Warren Buffett has slagged on gold several times, emphasizing its uselessness.

Gold or Bonds

Bonds—the safe go-to asset du jour—are debt instruments: a loan with an attached promise. The only confidence in a bond is the ability of its issuer to pay it back in full with interest as specified. Issuers of commercially available bonds are governments (at all levels) and corporations.

Governments have historically been the safest bond issuers, but history tells us even governments don't pay their debts as they should. There have literally been hundreds of defaults, partial defaults, effective defaults, or forced debt restructurings by governments in the last 500 years. This includes the most trusted governments of their day, such as the United Kingdom, France, Germany, Spain, and yes... even the United States.

Corporations are even worse and it's reckless to hold long-term corporate bonds as a safe investment asset. It's almost laughable that Apple Inc., in the notoriously volatile tech sector, is issuing 30-year bonds at rates just 1% above government debt. Remember Eastman Kodak or Nokia's cash hoard? I don't either.

The dangerous part about bond investing today is that we are nearing a crisis point in government debt for the largest bond issuers. The U.S., the U.K., Japan, Italy, Ireland, and Spain have very high debt levels. Since bonds are denominated in fiat currency terms, not gold or hard assets, it's easier than ever for governments to crank open the printing presses, devalue the debt, and pay it back in full—technically speaking.

I would be surprised if major governments didn't try to "stimulate" the economy next down-cycle by going through a massive devaluation.

Even the U.S., the greatest country of the 20th century, effectively did this twice in the last hundred years: in 1933 and 1971. The government printed more money, devalued the currency relative to hard assets, and met their obligations. Of course a large bond holder in 1932-1934 or 1971-1974 would eagerly tell you they were cheated.

Naturally if the government devalues their currency undermining bond values, corporate bond issuers benefit the same way. They will raise the prices of their goods and services to match inflation, but you can bet they won't offer to pay more for their bonds when it's time to cash them in.

If you must hold bonds because it makes you feel better, focus on short-term government bonds, even if the interest rates are not as good. It's also smart to choose good issuers. A country like Switzerland, Singapore, Norway, Canada, or Australia with very low debt levels is far more likely to uphold their bond and currency values than highly indebted countries.

Gold is not a bond and it never will be. Critics correctly point out that gold doesn't pay interest and that's okay. Gold is just a representation of a store of value. It's something that's tangible, quite rare, and makes a great asset that can be used as a medium for exchange without losing it's value. For thousands of years man has recognized this use for gold and I don't think that's going to change.

Gold is a great hedge to a monetary crisis or other forms of similar government stupidity. It performed fantastically in the 1930s and 1970s and will likely do so again when currencies are intentionally devalued.

Gold has also done well in other periods where monetary supply was expanded through debt, such as the 2000s and 2009-2012.

Gold or Gold Miners

In my portfolios I use gold miners to represent gold. This isn't a must—a gold trust or real gold will do just as well. They might even do better if you believe there will be a full loss of confidence in government, currency systems, and financial markets in the next monetary crisis.

I'm personally a little more optimistic than that and I'm very optimistic about the prospects of gold mining companies. In 2008 when gold prices briefly collapsed with the Financial Crisis, gold miners were heavily indebted after years of aggressive expansion during the resource boom and teetered on a liquidity crisis. Gold miners were punished with the rest of the market although they recovered months earlier and much more aggressively than the wider market.

Now we are in very different circumstances. Thanks to the gold bear market since 2012, many gold miners have low debt levels, they've significantly trimmed their costs, and have been typically cautious in deployment of capital. Without debt and liquidity problems holding them back, they are likely to do very well if the price of gold increases.

Miners are quite levered to precious metal prices. If all-in sustaining costs for a miner are $900/oz and gold is selling for $1,200/oz, the miner makes $300/oz of gold mined and sold. If gold prices jump 25% to $1,500/oz, the miner's profits will increase 100% to $600/oz.

Miners like Goldcorp, Pan American, Agnico Eagle, Kinross, and First Majestic have very low debt levels. Franco Nevada, the big streamer, has no debt, while Wheaton has very little debt. These companies are not likely to fail and are nicely levered to precious metal prices.

Gold or Silver

In history gold or silver could often be used interchangeably as a store of value, for transaction purposes, and as a hedge against currency devaluations. Typically when gold does well, silver does well too. Silver also has industrial use as a great conductor of heat and electricity and as a anti-microbial material.

That said, there are differences in the value of gold and silver. Historically, the ratio of silver to gold has varied between 15:1 to 100:1. It's currently trading 75 grams of silver to 1 gram of gold, implying that silver is cheap relative to gold.

While gold might do well in the next bear market, silver could do even better.

Limitations on Precious Metals

All this said, there are clear limits to the use of gold or silver as an asset in your portfolio. If all your money is 100% invested in gold and silver bullion, you might always have a nice hedge to government stupidity, but that doesn't make you rich, it just makes you Chicken Little.

One ounce of gold isn't going to grow another ounce every 10 years, but we know that productive growth assets like stocks often double in value in a single decade.

You want to have the bulk of your assets invested in something that is productive and grows in value, like shares in a good business (stocks), productive farm land or timber land, or profitable rental real estate. Preferably a bit of each if your net worth allows for it. Reasonable diversification across assets is always a good choice.

I personally choose 10% of investment net worth as a nice round number for precious metal assets. It's enough to do what it does without having a significant downside on returns.

Need evidence? In the last 100+ years, a portfolio consisting of 90% stocks and 10% gold would have outperformed a portfolio of 90% stocks and 10% bonds by nearly 0.5% per year while having lower drawdowns. And that's in an environment where currency was pegged to gold for the first 70 years.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.