You Don’t Get Rich by Being a Dumb-Ass


You don’t become one of the richest geezers on the planet by being a dumb-ass.

Recent action shows Warren Buffet is just as shrewd at 88 as any other time in his long life.

The third-quarter filings of his firm, Berkshire Hathaway, showed that Buffet is loading up on US bank stocks.

In fact, 40% of Berkshire’s total US$200 billion in equity exposure is in financial services.

That’s a concentrated bet.

We know one reason why: US bank stocks are cheap.

Six of the biggest are trading at or less than 10 times earnings.

It’s incredible to think that such an important sector could be discounted so heavily nine years into a bull market.

No wonder Buffett is loading up!

You might be surprised. The ‘yield curve’ (the line that plots interest rates for bonds over a set amount of time) is flat — traditionally not a great environment for banks…

Buffett is clearly looking beyond the short-term dynamic.

He sees opportunity.

And you should too…

Buffett’s looking ahead to the next decade, at least.

He would know perfectly well that Trump is deregulating the sector…and America’s demographics are entering a 10-year sweet spot.

Buffett plays the long game.

He can ‘bank’ the dividends and wait for the negative sentiment to turn positive again.

It always does — eventually.

Banks are the very heart of the economy.

Any potential recession or crisis would hit them hard.

Clearly, Buffett views this as a low probability scenario — or that it’s already priced in.

Let’s not forget that Buffett is in a privileged position compared to the rest of us.

I’m not talking about his wealth…

I’m referring to the fact he has a stake in so many different North American businesses.

His finger is right on the pulse of the American economy.

We would do well to follow his lead here…depending on your investment timeframe, of course.

Look around: Stocks are nowhere near richly valued.

The Wall Street Journal puts global valuations at their cheapest point in half a decade by some measures.

Even two of the glory stocks of recent times — Apple [NASDAQ: AAPL] and Facebook [NASDAQ: FB] — trade on a modest price-to-earnings ratio of about 14 and 21.

Yep, Facebook — the dominant social media platform across the entire world — is priced less on a lower multiple than some local Aussie stocks!

Now, I haven’t done a specific study on Facebook.

I do know the market is depressing its valuation because of the risk of regulation and its slowing runway of user growth.

It’s always a question of risk versus reward. But it remains a very powerful advertising platform.

It’s hard to believe that there was a time when Facebook wasn’t the most dominant social media company.

Way back in 2006, MySpace was the most popular website in the world.

It’s interesting to reflect why Facebook succeeded and MySpace didn’t…

Don’t leap from photography to restaurants

Clearly, MySpace came first…and built a powerful lead.

Facebook took the concept…and improved it.

Part of that was encouraging people to use their real identities.

And here we are a decade and $400 billion in market value later.

There’s a bit of a ‘cheat sheet’ that can happen in markets.

It’s not always the first firm to break open an idea or new innovation that wins the ultimate prize.

Facebook is one example of that. Google is another. It wasn’t the first search engine — but it’s certainly the biggest now.

It’s one reason why I’m always hunting for businesses that can take a proven business model…and add in a killer extra feature.

It’s also a way to ‘de-risk’ your investment.

I remember getting in a taxi many years ago. I got to chatting with the driver.

He told me he’d been a successful photographer but had lost all his money by launching a restaurant.

It was a business he didn’t know…and he got wiped out.

Entrepreneurs risk their capital like this all the time.

As an investor, you don’t have to do this.

You can pick and choose.

I like knowing there’s a history of success already…but there’s some new product development to drive further expansion.

Of course, it’s not always easy to find.

I remember trying the search engine Duck Duck Go. This doesn’t track your search history like Google.

I wanted to use it. I heard the founder speak and appreciated his libertarian and thoughtful advocacy of his business.

But I found the search results slightly worse than Google…and there was no other feature to keep me hanging around.

Of course, I’m discussing this in the context of being a user here. Duck Duck Go is not an investable idea.

But you get the point.

Imagine finding a search engine that took Google’s business…and took it up another level.

That may not be out there right now.

But it’s a useful way of hunting for investment ideas across all industries.

We want to find a proven model…with that extra something that puts us on the equivalent of Facebook…and not MySpace.

The question is, how do you do it?

I believe I’ve found an answer…and I’ll reveal more next week.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch