Investment advice for someone young?

[prunes]

I'm really young and have a lot more money than most people my age, primarily as a benefit of living at home and saving while making $60,000 a year straight out of college. Unfortunately, all this money has been gaining practically zero interest thanks to the Fed and I don't see many good investment opportunities at the moment. I'm comfortable managing a portion of my portfolio but I feel like it might be a good idea to have a professional money manager handle the rest--say 50%.

 

I guess you could say I'm looking for help finding an investment manager. Obviously I want someone value oriented. I'm OK with my money being tied up in illiquid / unusual securities. I respect guys like Bruce Berkowitz, etc., but I don't think his Fairholme Funds are nimble enough due to their large size. So what I'm trying to say is I'd be comfortable investing with someone smaller and less well known as long as I was certain of their integrity, risk aversion (demanding necessary MOS), etc.

 

Any thoughts / suggestions?

[Myth465]

Not sure how young you are or how much cash you have, but judging by your post you seem to be doing well enough. I have been doing this for 4-5 years and feel like I am just starting to understand whats going on. I can say it only gets easier, as your knowledge compounds and your circle of confidence grows.

 

It must feel like taking candy from a baby for Buffett. They say a basketball feels like a tennis ball to a professional player, I think its the same in investing. I wish I had come to value investing earlier, and also wish I were investing in a world where macro didnt dominate the discussion. Inflation / deflation / gold / oil / silver is far more important then I would like it to be, but alas this is the hand we were dealt.

 

It sucks to be a saver, but I dont think yield is too hard to find. You could put together a portfolio of preferreds / high yield which would give at least 7% or so. SSW preferreds are at 9% - 10%, FTR yields 7% or so, ATPG has 10% preferreds, SD 6 months ago had preferreds which were convertible and yielded 7% they have likely doubled. ICO, and FBK also had nice preferreds / debentures which have done well.

 

Regarding a manager. I agree with Parsad, I just want someone smart who I trust. Today I would probably give my money to Zeke Aston, or Francis Chou. I like Bruce B, but his fund is too big, and he owns to much in Finance for me. Also I would likely built a porftolio of value investor owner managers. You dont get much better than LUK, FFH, BRK, perhaps MCF, FUR, L, and a few other guys with 10% - 20% positions. All these guys have cash and invest counter cyclically. You would have a team of players who are all top stars each looking for value in there respective games.

 

I dont think there is a better steward out there for capital than Prem Watsa.  I dont like the pricing on FFH (cats and declines in book value arent priced in), but when I grow tired of this my capital will go there or to people like him (Chou).

 

---

 

I would probably invest 30% of my funds in long term holdings which I held on to (stuff like ATSG and the like), would put 40% with those owner managers, and would probably put 30% with a few fund managers. Similar to the guys at Cornwall capital, it sounds good and feels good but when you look at the returns most funds just dont do it for me. 5%-8% in good years and -15% in bad, just doesnt work.

 

Besides the numbers, I dont like the process I hear from most managers. Thats probably the most important thing for me. Whats there process.

 

Finally my unsolicited advice for the day is I recommend reading this thread. Being young I find myself thinking about it as well - http://www.fatwallet.com/forums/finance/1090030/

[Rabbitisrich]

Hi Prunes,

 

I also have a limited amount of experience, < 4 years, and reading sites that follow money managers, like market folly and gurufocus and dataroma, helped to narrow the field. I also like to check on money managers who own the same unpopular securities that I own. If the remainder of their portfolios look interesting, then you may have a good prospect.

 

It would also be a good idea to attend a popular investment conference to introduce yourself to the various money managers. There are plenty of hungry, intelligent managers with limited capital, who would love to increase AUM by even a million dollars.

 

Good luck!

[benhacker]

There are plenty of hungry, intelligent managers with limited capital, who would love to increase AUM by even a million dollars.

 

Wow, I really have set my sights too low. ;-)

 

Ben

[S2S]

The first thing I'd do is to get a Morningstar subscription. They provide a wealth of information on money managers AND individual securities. The fees pay for itself in no time.

 

Other than board favorites such as Fairholme, Longleaf, Oakmark, Yacktman, Weitz etc there're dozens of funds with stellar track records: Ariel, Artisan, Fidelity Low Priced, Calamos, Thornburg. And so on and so on. Good luck!

[A_Hamilton]

As Andrew Carnegie said, "Put all of your eggs into 1 basket, and watch that basket!"

[prunes]

Oh I nearly forgot to mention. I want a manager who has a substantial portion of his and his family's capital tied up with mine, like Buffett did when running his partnership, and like Bruce does now. Also, can you really search for a manager based on prior performance? I think a lot of studies show that the best performing managers one period are the worst the next. That doesn't seem like a good way to evaluate in my opinion.

[S2S]

Oh I nearly forgot to mention. I want a manager who has a substantial portion of his and his family's capital tied up with mine, like Buffett did when running his partnership, and like Bruce does now. Also, can you really search for a manager based on prior performance? I think a lot of studies show that the best performing managers one period are the worst the next. That doesn't seem like a good way to evaluate in my opinion.

 

Of course there's that risk... hence some variation of "Past performance is not a guarantee of future performance" on every money manager's public document.  ;D

 

The flip side of the coin is that Buffett, Watsa, Cummings et al would just be average Joes if one is not cognizant of their paper trails. Here's where I think a solid understanding of the manager's process, discipline, strength/weakness etc etc. That's why the more information you have, the better.

 

Speaking of which, you might already have Morningstar or ValueLine access via your alma mater (I do, but fortunately don't need it). Use it.

[Guest ValueCarl]

Young man. I don't know how young you are, or "relatively rich" you have become with your current career trajectory and associated before tax salary as well as low cost of living situation, but seeking the next "Buffett" to do what he has done for himself in addition to certain lucky shareholders over many decades, is more than likely, a one in a two hundred billion lotto ticket probability. I may be underestimating the "probability" here.   

 

Rather than do that, you may be wiser to take Dr. Patrick Byrne, a Buffett disciple's advice, in addition to Mr. Buffett himself.

 

Stay away from this gambling casino called the "stock market" according to Byrne, and "invest in yourself" according to Buffett. There is far less RISK in investing in yourself because you, for the most part, control all the outcomes and will only be able to point your finger at yourself, assuming you're unhappy in the end. You sound enterprising; therefore, you may be able to build some special business plan tied to what you currently know, while gainfully employing a lot of needy people during the process.  Good luck, and good fortune building!           

[Uccmal]

When your young the order should be Sex, Drugs, and Rock and Roll:  #2 in moderation, the others in excess.  ;D

 

Prunes, if your on this board and following investment discussions I wouldn't want to tie up all of your money for too long.  Before long you might realize that you can outperform most of the best funds out there. 

[valuecfa]

Prunes,

 

In a manager finding someone you trust, whose investment style you understand, and who has their own money in their fund is important as you seem to already know. Paper trail is important, but one of my biggest criteria would be that when i look at their holdings i can understand why they hold what they hold.

 

In your personal investing, don't get too overconfident in your abilities, especially while you are young and have a fair amount of money already saved. When i was in my early 20s i had a bit of money that i was overconfident with and took some lumps because of it. Just because i knew what a p/e ratio was, and a little balance sheet analysis knowledge, and read a few Warren Buffett books, i though i had it all figured out....Know you limits. A little knowledge in stock analysis can be a dangerous thing. The recurring theme on this board is to not over-diversify, which i agree with, but you have to be very sure you understand what you are doing if you take this approach. Most managers fail to beat the market over the long term for a reason!

 

Happy Investing!

[alwaysinvert]

When i was in my early 20s i had a bit of money that i was overconfident with and took some lumps because of it. Just because i knew what a p/e ratio was, and a little balance sheet analysis knowledge, and read a few Warren Buffett books, i though i had it all figured out....Know you limits. A little knowledge in stock analysis can be a dangerous thing. The recurring theme on this board is to not over-diversify, which i agree with, but you have to be very sure you understand what you are doing if you take this approach. Most managers fail to beat the market over the long term for a reason!

Slightly off-topic but anyway. Would be very interesting to hear more about this. What was the main things that you overlooked etc?

 

I have a similar situation to OP, but at the same time very different. Young (22) but have a large pile of savings, though not a great prospect for earnings, aside from cashflow from that money, for the next 4-5 years, while I get the education I pushed forward to be able to make money in a short window. Balancing spending and saving is tricky. I am afraid that I will regret my decisions no matter what I do. But being extremely well-off at the age of 35-40 seems like a goal that I can sacrifice for at the moment.

[Guest Bronco]

I would get educated as hell and listen to no one.  Trust no one.  Know what you don't know. 

 

AIG was the best insurer right - best brand, biggest, baddest.  CEO says there are no CDS issues.  BAM, their broke. 

 

Learn from the past and realize financial stocks are extremely complicated. 

 

Think long-term and invest in ideas that will be around in 10-15 years without doubt.  I broke these rules personally for Apple and Google, but you get the idea.

 

Buy great businesses at great prices.  Or, if not available, buy great businesses at good prices. 

 

JNJ is a recent good example. 

 

Don't listen to the jerkoffs that push all kinds of financial engineering - buy companies that hold a lot of cash.  Apple.  Google.  Loews.  Berkshire Hathaway.  These stocks can get hammered just like everything else but they shouldn't go to zero b/c of so much cash.

 

You're young - take a couple risks.  Learn from you mistakes.

 

Like the myth said - find some good managers.  But keep your eye on them.

 

Read my posts here.  I am a genius.  But also a liar.

 

Learn some form of risk control.  Absolutely the most important thing.  Learn about writing puts, buying puts, selling calls, etc.  And learn you may be better off not touching them.

 

Keep some cash on hand for the big crashes.  There will be more. 

 

Buy some real gold.  Coins perhaps.  They may go down in value but worst case they are like Brooke Burke - gorgeous.

 

Very few companies have businesses that last forever.  Find ones that reinvest themselves.  Berkshire.  IBM.  Loews.  GE.  The list goes on and on.  If you find a business where the pie is getting smaller (i.e. newspapers) - don't fight it. Get out.

 

Find new businesses where the pie is growing.  Find the best business in that area.

 

Read Roger Lowensteins book on Buffett.  Don't read the one that involves snow.

[finetrader]

When your young the order should be Sex, Drugs, and Rock and Roll:  #2 in moderation, the others in excess.

 

I agree!.    Sex.........and Rock'n'roll.. the American way!  :-\

[alertmeipp]

Just be happy.  ;D

Be water, my friend.

[Valuebo]

When i was in my early 20s i had a bit of money that i was overconfident with and took some lumps because of it. Just because i knew what a p/e ratio was, and a little balance sheet analysis knowledge, and read a few Warren Buffett books, i though i had it all figured out....Know you limits. A little knowledge in stock analysis can be a dangerous thing. The recurring theme on this board is to not over-diversify, which i agree with, but you have to be very sure you understand what you are doing if you take this approach. Most managers fail to beat the market over the long term for a reason!

Slightly off-topic but anyway. Would be very interesting to hear more about this. What was the main things that you overlooked etc?

 

I have a similar situation to OP, but at the same time very different. Young (22) but have a large pile of savings, though not a great prospect for earnings, aside from cashflow from that money, for the next 4-5 years, while I get the education I pushed forward to be able to make money in a short window. Balancing spending and saving is tricky. I am afraid that I will regret my decisions no matter what I do. But being extremely well-off at the age of 35-40 seems like a goal that I can sacrifice for at the moment.

 

As a 21-year old student I totally agree. In fact, it seems like the reward system in my brain gets excited from savings and not spending money on stupid stuff. My personal greed factor gets satisfied over a longer time period by saving, instead of spending it on consumer goods that give short bursts of satisfaction. My largest costs are actually kind of investments, namely books and a gym membership! ;d

 

A large part of my money is in companies like BRK and FFH just because I realise how much I still have to learn. Although I am making sufficient progress, the road is long and I have plenty of time.

[namecsw]

 

I presume you're trying to get rich. Here's what I'd suggest.

 

Think in terms of 10 doubles.

 

That's turning 1 into 2, then 4, then 8, and so on. Years ago, when I was first studying Warren, and was comparing his record to Templeton's, I noticed that the compounds were different, but each turned one dollar into about $1,024.

 

From there, I looked at various success stories in terms of 10 doubles. At the time, Coke's market cap was 1000x what Woodruff had paid for it. McDonald's, one of the great growth stories of the '60s, was 1000x its IPO price. Same for Wal Mart. Later on, it was true for  Microsoft at the dot com peak. Ten doubles is about as good as you can do.

 

(BRK, for example, was $38 when Warren closed the partnership. At $150,000 per share, it had doubled 12 times.)

 

A compound that gives you ten doubles is about the best you can do...as an investor, or on an investment.

 

Once you start thinking in terms of doubles, it's pretty simple.

 

Start with $1,000. The easiest way to double it is probably through saving. While you're saving, study investing.

 

Ditto for the second double, from 2k to 4k.

 

By 8k, you'll need an investment strategy, or the basis of one. You can still get another double through saving, but you'd better have the foundations of an investment approach in place by 16k.

 

The key to investing is to know more than most. Pick a market that interests you, read obsessively and, over a period of years, you'll learn enough to find something. (I started working obsessively on Linux in 1997. I had nothing to show for it until 2003, when I realized that OSX was what Linux wanted to be when it grew up. The investment worked out OK.)

 

Think in terms of 20 punches. Warren tells everyone that 20 punches is the key to investment success, yet just about everyone ignores him. I know a lot of value guys (my first BRK meeting was 25 people) and all of them, to a man, think it's weird.

 

It's not.

 

If your aim is 10 doubles, that means 10 investments that double your portfolio. If you're young, and you've got 50 years in front of you, that's finding one investment that will double your portfolio every 5 years. It's hard, but it can be done.

 

Finally, picking a big winner is hard, but holding on to it is even harder. When you're up 8x or 16x on an investment you start to worry about giving it all back, and that sort of thing. It's surprisingly hard to hold on to a big winner.

 

That's a good start.