Intelligent Money Profile Showcase
Words of Wisdom: Whitney Tilson
The Whitney Tilson Collection showcases curated Hall of Fame conversations, offering practical insights and inspiring advice for curious learners of all ages. The Collection draws on Whitney’s decades of experience in finance, writing, and community leadership. Learn more about Whitney here.
Keys to Successful Investing:
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Think long-term. Do not try to get rich quickly.
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Risk is not volatility. Risk is the risk of permanent loss of capital.
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To avoid permanent loss of capital, stick to businesses that generate a lot of free cash and that do not have a lot of debt.
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“Be fearful when others are greedy and greedy when others are fearful." - Warren Buffett
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The bane of every value investor is value traps, which are stocks that never turn around and the worst value traps decline to zero.
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Make sure you are getting a market interest rate on your cash.
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Commodities Supercycles
A monthly advisory focused on top natural resource investments. Each month, Stansberry Research uses its expertise and industry connections to recommend oil and mineral explorers, drilling and oilfield-services providers, power companies, and leading gold and metals firms worldwide.
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About Whitney Tilson
Whitney Tilson is a renowned investment professional, financial educator, prolific author, and community leader. He currently serves as an Editor at Stansberry Research, where he provides advice, commentary, and in-depth analysis to help people become better investors.
In 2018, prior to joining Stansberry, he founded and ran Kase Learning, through which he taught investing seminars around the world and hosted two conferences dedicated solely to short selling. For nearly two decades before that, he managed Kase Capital Management, which oversaw three value-oriented hedge funds and two mutual funds.
A graduate of Harvard College and Harvard Business School, Tilson has long been committed to education, both in the classroom and beyond. He has written extensively on investing and personal finance, striving to make financial literacy more accessible. His efforts extend to community initiatives as well, including supporting organizations dedicated to education, economic opportunity, and social impact.
Throughout his career, Tilson has combined his expertise in finance with a deep belief in the power of education and community engagement, leaving a lasting influence in both the investment world and the broader public sphere.
Collection Transcripts
The following edited transcripts are part of an upcoming profile in our program and are listed below in full detail.
Essentials
Worldly Wisdom
When Charlie Munger talked about worldly wisdom, he talked about having a toolkit to build your mental toolkit. One of his favorite sayings was that you do not want to be the “one-legged man in the ass-kicking contest.” Another was, “To a man with a hammer, the world looks like a nail.” His point was that people tend to see things in very narrow ways. Instead, he said you want what he called a latticework.
So, he said, you want to study. If you are an engineer, yes, you want to study engineering, but to have worldly wisdom, to understand how the world works and solve complex problems, you need to go beyond that. Investing is a complex problem for sure, but so is living a successful life. You want to understand history, philosophy, psychology. He was always talking about how, if you want to understand human behavior, you have to study it. He said he never ceased to be amazed at how self-interest bias determined human actions.
He gave examples, like a doctor who only knew how to do one type of surgery. It turned out the surgery did not work and actually harmed patients, but the doctor kept doing it and genuinely believed he was helping people even when overwhelming evidence showed he was not. The reason was that this was what he knew how to do, and it was how he paid his bills and made a living.
Charlie would also point to business examples, like when Coke launched New Coke. He explained why that was such bad thinking, because the company did not understand human psychology or the brand Coke had built over a hundred years, with all the emotional connections people had to it.
Trading is Hazardous
Every study ever done on individual investor accounts shows the same result. Researchers found that the more trading you do, the lower your returns. In one study, I do not recall if it was Fidelity or Vanguard, researchers looked at millions of accounts, all anonymous, and the pattern was clear. There was a straight-line correlation: the more trading, the lower the returns. The accounts with the highest returns actually belonged to dead people. These were dormant accounts with no trades at all.
It is a pretty simple concept. At the extreme, with supercomputers and quant funds, I do believe it is possible to succeed. In fact, some of the greatest investment successes, like Jim Simons and the Medallion Fund, have built extraordinary track records by finding small inefficiencies and making millions of trades a day. But human beings cannot do that.
Investor Mindset
I would argue that being a successful long-term investor is 50 percent building skills—being smart, hardworking, understanding industries and businesses, getting yourself a good job, an apprenticeship, learning everything. All of that is 50 percent. The other 50 percent is controlling emotions and the psychology of investing. You have to start with the fact that the vast majority of human beings, all of us, are in some way irrational when it comes to money and finances. You see it manifesting itself going back centuries: the tulip bubble in Holland, the South Sea bubble in London, and so on.
Human beings are hardwired to want to get rich quick. Of course, the key to getting rich and building wealth is to do it slowly. The surest way to get poor quickly is to try to get rich quickly. This is how people get sucked into bubbles and all the madness of crowds, looking at others making money.
For example, I think of Bitcoin and the Winklevoss brothers, who have been big champions of it. Over ten years ago, when Bitcoin was around $600, they spoke on stage at a conference I organized. I was standing next to them as they laid out the case for this new type of currency. On the one hand, I feel terrible regret. From $600 to $6,000 was a 10-bagger. From $600 to $60,000 was a 100-bagger. At today’s price around $120,000, it has been a 200-bagger. I sometimes think, why did I not just put 1 percent of my portfolio into it? On the other hand, the psychology behind it is clear. The reason Bitcoin has kept going up is because people see others making so much money and that psychology draws more people in. But the truth is that Bitcoin has zero intrinsic value. It generates no cash flow. It has no real function or utility.
The key is to recognize all the irrational tendencies people have when it comes to money: herding, projecting the immediate past indefinitely into the future, anchoring on recent or vivid but irrelevant information, loss aversion, and more. Every human being is subject to these mistakes. Even Warren Buffett has acknowledged making them. To be a successful investor, you have to understand that 50 percent of success is about mastering these psychological challenges.
Sometimes little tricks can help. For example, if I went back to managing other people’s money, I would structure a portfolio of 10 stocks, each held for an average of 10 years. But I would put that commitment in writing and tell my investors in advance, to force myself to stay patient and disciplined. I know I am not strong enough to always overcome investor irrationality on my own, so one solution is to contractually tie yourself in. That is really critical.
There are great books on this subject. Thinking, Fast and Slow by Daniel Kahneman is one of them, and there are many others that explore the psychology of decision-making and investing.
Federer, Tennis and Investing
At the 2024 Dartmouth University Commencement speech, Roger Federer talked about how even at his absolute peak, over the course of his best year, he won only 58 percent of his points. That is not much more than half the time. He said he had to be able to put failures, missed shots, disappointments, or an opponent simply hitting a better shot behind him. Even when you are successful, you are going to fail about 42 percent of the time, since the opponent wins those points. Having the mental resilience to deal with setbacks, and understanding that in any competitive field there is no way to win all the time, is critical. We all know tennis players who let one bad call or one bad shot cause a complete meltdown, and they end up losing to someone they should not have lost to.
If you want to be the top tennis player in the world—or the top investor in the world—you have to understand that mistakes will happen. Sometimes you make a good investment, the probabilities are in your favor, but something unexpected comes out of left field. In investing, you can also make a terrible decision, something completely foolish, and still get rewarded for it. Buying Dogecoin or some junk crypto at the right time might make you money if you are lucky, but that does not mean you were smart or that it was the right decision. Charlie Munger had a funny analogy: if you run through a dynamite factory with an open torch and make it to the other side without blowing yourself up, that does not mean it was a good idea. The same is true in investing.
Conversely, you can do great analysis, find a sound investment, and still lose money because of a low-probability event. That is frustrating, but that is how probabilities work. You need resilience, what I call the mind of a goldfish. You lose money or something goes against you, but you cannot let it upset you to the point that it changes your thinking and snowballs into worse outcomes. Yet it happens all the time. Just watch a tennis player lose one point, have a meltdown, and then lose the match. The same thing happens in investing.
You might invest in a stock, but if the three pillars of your investment thesis are blown to smithereens and the stock is down 50 percent, you should get out. I am not saying you should always sell when a stock is down. If your thesis is still intact and the fundamentals are strong, a lower price might be a buying opportunity. But if your investment thesis is gone, you should exit. What do most people do instead? They do not want to acknowledge a mistake. They want to at least get back to even before selling. Often, they either hold on or worse, they double down. That is how a modest loss on one stock turns into something that can wipe you out.
Become a Learning Machine
I'd say the importance of being a learning machine. I was fortunate. My parents always bought me lots of books and gave me lots of exposure. So I was always sort of a smart kid, got good grades, but I always looked to cut as many corners as I could. My objective was to get an A minus, maybe a b plus doing as little work as possible. And so for example, I wouldn't do the assigned reading. I would skim it or use cliff notes or I would just go to the lectures in college. So I had the incredible privilege of going to one of the greatest universities in the world at Harvard and had some of the greatest professors and most interesting classes. And I figured out that if I went to the professor's lectures and took good notes and then regurgitated what the professor had said on the exams, I could get good grades and I didn't have to do the reading and what a waste to have the privilege of going to Harvard and not fully engage and do the work and do a deep dive and do more than what was asked of me.
I would always do the least amount I could get away with. So I graduated magna cum laude and didn't, but mostly because I was smart and figured out the shortcuts as I've grown in life, developing deep learning. The other thing I didn't figure out as a young person is by the time I graduated from Harvard and Harvard Business School with high honors and all, I thought, okay, now it's time to monetize this sort of hard work, but these degrees and whatever. And what I realized is I didn't know anything at the time. I just had a good foundation to then become a lifelong learner, but getting on a steep learning curve and staying on it your entire life. Warren Buffet just turned 95 a week ago, and he's still on a steep learning curve. He got on a learning curve at why is he one of the world's wealthiest men and successful investors, but he would've been a successful doctor or any field he chose because he developed a passion early, but then got and had the inherent smarts and so forth.
And being born a white male in the United States of America 95 years ago was obviously a huge tailwind and had a good family, et cetera. So as he says, he hit the ovarian lottery by being born into all of this, but critically got on a steep learning curve and never got off it. He is a reading machine, a learning machine, and I was a shortcut machine for the first 30 odd years of my life, and then Buffett and Munger got to me.
Buffett Classics
Secrets to Success
Warren Buffett always talks about the three characteristics he looks for: smarts, hard work, and integrity. He says that if integrity is missing, you do not want the other two. Other than my parents, Buffett and Munger have been the biggest influence on me, and that was one of the earliest lessons I learned from them.
Charlie Munger also always talked about becoming a learning machine. He said, “I am like a book with legs,” because he was constantly reading. I too was always a reader from a young age, and that idea resonated with me.
Lastly, Buffett once said something I have not seen repeated often, but it really had an impact on me: “The chains of habit are too light to be felt until they are too heavy to be broken.” What that means is that it is the little things, day in and day out, the hundred small habits, that shape your future.
The Legacy
I initially discovered them and spent a lot of time studying and reading everything about them and everything they'd written because I developed an interest in investing. They're two of the most successful investors of all time. And so it was sort of self-serving, I wanted to make a lot of money and be a successful investor. And so it's like if I wanted to hit a baseball and Ted Williams were conducting a clinic somewhere, the last guy to hit 400, I'd go out and study him and everything he had to say about hitting.
But after in the 26th year, I probably wasn't learning anything new about investing. But they're such great teachers just not just about investing, but about life and worldly wisdom is what Charlie Munger calls it. And so I felt like every year coming and just sitting there for six hours at the Berkshire Hathaway annual meeting and hear them fielding all sorts of questions, there was always some insight and something that I took home like the chains of habit or too light to be felt until they're too heavy to be broken. And Charlie Munger about talking about to solve problems, invert, if you want to be successful, think about what are the things that will cause you to be unsuccessful and avoid them. That's a classic example of what he's talking about.
Arrogance and Humility Equation
Obviously both these men had very high IQs, but there are a lot of people with high IQs and very few of them to the extent they go into the investing business are successful. So what differentiated these guys, they were at it a very long time. They had a very long runway and they didn't have any zeros along the way. So in other words, if to build a long-term investment track record each year, one year you're up 10%, another year you might be up 15%. Another year you might be down 5%, but if any one of those years is a zero, you multiply it all out, the end result is a zero, right? They were very conscious of that. So they married extreme intelligence and you would say arrogance like anyone who gets into this investing business, you have to have a degree of high self-confidence bordering on arrogance because think about it, anytime you buy a stock, you believe that you are right and everybody else out there is wrong.
That's sort of an act of arrogance, right? So pretty much everybody in the investing business has the arrogance part down pat. What they're missing is the humility part, and that's rare. There are very few people who have the confidence bordering on arrogance to get into the investing business and think they're smarter than everybody else, but also have the humility to say, you know what? I don't know anything about cryptos or cocoa beans, or whatever the hot thing is. So that was, if the logical end result of that kind of framework is you stick to high quality businesses and have a long-term investment horizon and don't make very many decisions, say no to 99 out of a hundred things, and only when something comes along that's just right in their sweet spot where they understand it, where the company, it's within their circle of competence. They never straight outside their circle of competence.
They had the humility to say, I just don't know enough about this company or this industry or this country to invest over here. That's okay. I'm going to stick to my knitting focus on high quality businesses, invest for the long run and look to make only a very small number of investments every year. And that paid off for them in spades.
The Playbook
Getting Started
To not try and do it at all. In other words, if you are saying, what would be the starter kit for being a fighter pilot, my answer would be: if you are not going to really dedicate a lot of time to it and go through the apprenticeship process, then you should not try to fly a fighter jet because you are going to crash and die. And in investing, you are going to lose all your money. The vast, vast, vast majority of people should simply own index funds. Keep fees low. Actively managed funds, almost all of them underperform over an extended period of time. So stick to low-fee index funds.
My sister, for example, has been in the field of international maternal health, working long before Trump and Doge blew up USAID. She has been in that field for many years. So what does this have to do with investing? The answer is she never tried to be an investor. For 25 years, she had money withheld from her paycheck that went into a retirement account. And here is the key: it was automatically invested in the S&P 500 index at Fidelity. And here is the other key: she never looked at it. She even forgot she had this account at one point. She had left one job and was working at another. She called me up and said, “Whitney, I seem to recall I had a retirement account at my old employer, but how do I find out about it?” I told her, “Call the HR department and ask.” She called me back the next day and said, “Oh my God, I have $600,000.” That was 20 years of saving and compounding.
The key is she did not freak out and sell during the global financial crisis, the Greek debt crisis, the COVID crisis, or anything else. She had sort of forgotten about it. That is exactly what I have told my daughters to do. None of them has shown an interest in being an investor. But all three are now in the working world. I told them the most important thing is to have your employer withhold as much money as you can afford, so it never even hits your bank account. You never even see it. Then it automatically gets sent to your retirement account, is automatically invested in the S&P 500, and then forget about it for the next 40 years. You will have a nice nest egg by retirement. That is the advice for 99 percent of people.
Now, some people watching this are interested in investing as a hobby. You do not have to do it full-time, you do not need 10 years in the field before going out on your own. If you want to start your own hedge fund, yes, but otherwise you can index half your money and try with the other half. That is what I do today. I index half my money, and with the other half I pick 10 stocks. And I have been a stock picker for 25 years, yet I still index half my portfolio. That is another approach—take a modest amount of your money, pick a few high-quality businesses that you understand, maybe Costco, maybe Apple. You will probably do fine.
But do not get hooked on Robinhood. One sure way to incinerate yourself is speculating in cryptos and day-trading options on your Robinhood app. That is a sure route to disaster.
Improved Decision Making
I would start by saying you want to be in a position where you are choosing between an ice cream sundae and an apple pie. In other words, you want to have good options. Buffett talks about this in investing. He once said that when they invested in US Air years ago, it turned into a debacle. He almost lost all his money. He ended up getting out okay, but his point was this: in the airline business, as a board member or CEO, you face nothing but terrible decisions. It is a miserable business. Your choices are always between two bad options.
In life, you want to structure things so you have good options. Live your life in such a way, develop good habits and good relationships, so that your decisions are between good choices. The most important decision you make in your life is who you marry. The second most important is what career you go into. You want to be in a position where you can choose among a number of incredible people who would like to marry you. And you want to have the skill set and reputation so strong that throughout your career your decision is, do I stay in a good job with good pay and good people, or do I jump to another opportunity that might be even better? Those are the decisions you want to be making.
My wife and I, for example, often go to Kenya at Christmas to visit my parents. We have a beautiful beach house. Our decision is, do we go to the beach in Kenya or do something else wonderful for the holidays? I am not trying to be snobby. I am pointing out that making good decisions starts with having good options. And that is not random. It is a function of how you live your life, the habits you develop, and the choices you make along the way.
Munger would invert the question. How do you avoid bad decisions? Where do you make bad decisions? Number one, when you are sleep-deprived. Absolutely. Some of my worst decisions came when I was under great stress or had little sleep. Buffett said he does not want to know how he would behave under duress, so he structures his life and Berkshire Hathaway in a way that he is never under duress. During the global financial crisis or COVID, Berkshire was never in a position where it had to sell assets or take on terrible debt. That is deliberate.
I have done a lot of research on sleep, and I have seen in my own life how lack of sleep impairs decision-making. I used to think seven hours was enough. Now, at my age, I strive for eight. I avoid red-eye flights because they can wipe me out for days. That discipline pays off in better decisions.
Also recognize that many of the toughest decisions are personal and emotional—who to marry, whether to take a new job, how to handle someone who has wronged you, whether to sue or settle. These decisions are emotional, and strong emotions impair judgment. So if you are stressed, sleep-deprived, or in a highly emotional state, recognize your decision-making is impaired.
How to offset this? First, get good sleep. Second, avoid making big decisions when under stress. Third, seek outside counsel. I have been a member of YPO, the Young Presidents’ Organization, where we meet in forums and share our toughest issues in a confidential, trusted group. Having even one wise friend with perspective can make a huge difference. Recognize that you may not be the best-positioned person to make the decision. Trust others who have more distance.
Finally, give yourself time. Do not force decisions in the heat of the moment. For example, in divorce, emotions run high—custody battles, money fights, betrayal. That is the worst time to make big decisions. Step back. Recognize the process will take time. If you can delay a decision until tomorrow, you may make a better one. The toughest periods require patience. How do you eat an elephant? One bite at a time. The journey of a thousand miles begins with a single step.
One Message to Investors
If I had one message, it would be: think long-term. Do not try to get rich quickly. Most people watching this are young. A 25-year-old might have a 70-year investment horizon. Develop good financial habits and avoid short-term traps.
Right now, there is an epidemic among young men of sports betting. They are getting incinerated. Sports betting is even worse than short-term stock trading on Robinhood. At least with stocks, there is some chance of success. With sports betting, you are almost guaranteed to lose money quickly.
The key is to get rich slowly, to build wealth and financial security. That starts with finding a career you love. It does not have to be high-income. My youngest daughter just started her career as a teacher. Teaching is an apprenticeship business—you learn by doing, by working with experienced teachers. She just had her first classroom observation and got good feedback.
We have already had conversations about her retirement savings. Her employer set up a retirement account. She asked me, “How much should I set aside?” The maximum this year is $23,000, but she cannot afford that. That would be half her after-tax income. We talked and agreed she should start with $10,000. Set it up automatically so she never sees the money. It goes directly into the S&P 500. Keep it simple. I suggest 40 percent S&P 500, 40 percent equal-weighted, 20 percent international.
She is living at home to save money. Housing is the biggest expense for most people. Living at home makes sense for now. Interestingly, the percentage of 30-year-olds living at home has risen a lot. For the first time in US history, 30-year-olds are not doing better than their parents did. Incomes have stagnated, inequality has risen, and costs of education and housing have skyrocketed. Housing is the least affordable it has ever been in US history.
So young people today face real challenges. That means you have to be smarter, work harder, be more disciplined. Achieving financial independence and building long-term wealth is harder than it used to be. But it is still possible if you follow the right habits.
Measuring Risk
Risk is not volatility. Risk is the permanent risk of permanent loss of capital. That is sort of a cliché among Buffett and Munger and value investors. I am willing to stomach volatility, but I do not want to lose my money permanently. That is why I talked about investing in turnarounds, for example. I generally avoid companies that have a lot of debt because that introduces tail risk of a zero, a permanent loss of capital, all of my capital. It is simple in concept, though it can be difficult to implement. I also generally do not invest in things that do not produce cash flow. I do not invest in art. I do not invest in any cryptos because I cannot value them. There is no cash flow. If you want to avoid permanent loss of capital, stick to businesses that generate a lot of free cash and that do not have a lot of debt. That generally will provide a floor. For example, buying Facebook in late 2022, almost three years ago now. The stock was down a bunch. Earnings were down 40 percent, but the stock was down 75 percent, and the business, even with earnings down 40 percent, was still gushing cash flow and had zero debt.
The Investment Thesis
Before making any investment, you should have a reason. Why are you making this investment. Be very clear about your variant perception. What do you believe that is different from the consensus view. The consensus view is reflected in the stock price. If you are paying that stock price, you are buying because you think the consensus is wrong and this is a better company than everyone believes. Your investment thesis should embed a variant perception, for example that this company will turn itself around. It will replace the CEO who is doing a terrible job. The consensus view is that the CEO is horrible and therefore you should not invest. Your view is that they are going to fire him.
Or maybe they have already fired him and there is a new CEO and the market does not yet know who the new person is, and you went to a meeting and met him. Sometimes I have invested in stocks where a new CEO came in who I thought was the right person and had the right strategy to turn a company around. Another element, particularly for a value investor like me, is that I like to buy stocks that are beaten up. They are down 50 percent if not 75 percent, and I am betting on a turnaround. That could mean the business stabilizes and that is all that has to happen. The ice cube just has to stop melting.
My favorite type of investment is a company like McDonald’s back in 2002, when people were convinced that due to concerns about health and obesity, people would stop eating fast food. It was madness, and it was a great opportunity. Or look at Facebook in 2022. The stock was down 75 percent. I would argue Facebook, now Meta Platforms, is one of the great businesses of all time. I do not like Mark Zuckerberg. I do not like how Facebook and Instagram have been weaponized against young women, leading to body image issues. I do not think Facebook is doing a good enough job. I have problems with the company on moral and societal grounds. But it is an incredible business. And the stock went down by 75 percent.
I wrote a series of articles saying there were eight reasons earnings had declined by 40 percent and why these would either reverse or at least not get worse over the next year. These were one time hits. Facebook was investing very heavily in the metaverse and investors thought they were torching capital. I said they probably were, but they would not invest more the next year, and if anything he would cut back. The rise of TikTok was taking viewer eyeballs away from Facebook’s properties. Again, that was likely a one year effect. I went down the list. My thesis was that this is one of the world’s greatest businesses, gushing cash, and the things causing its earnings to decline are temporary or reversible. Therefore earnings would likely stabilize and probably revert. That would drive a huge turnaround in the stock, and the stock is up seven times since then.
You develop your investment thesis, and then you need to monitor it. Sometimes the thesis does not play out. The business does not turn around. The ice cube keeps melting. The terrible CEO is entrenched and continues to mismanage the company into oblivion. At that point you had better get out.
Variant Perspective
A variant perception is easy to develop and very difficult to be right about. The crowd is right most of the time. A variant perception simply means you believe something out of consensus. It can be about inflation, interest rates, something Trump does or does not do.
For example, back in April when Trump announced what was called Liberation Day on April 2, which was tariffs on every country on earth, there was a flash crash. In a matter of days the market dropped almost 20 percent. I wrote to my readers, do not panic, do not sell. My variant perception was that the cause of the crash was self inflicted. It was not a financial bubble bursting or an attack on the United States. It was created by Donald Trump, which meant he could reverse it in a tweet. Trump is a deal maker. The last thing he wants to do as president is crash the stock market or the economy. So he would probably back off at least somewhat on the tariffs, and the market would have a relief rally. That is what happened.
I also had a variant perception that was wrong. I invested a small amount in my personal account in a Russian bank trading at two times earnings three and a half years ago, on the eve of the invasion of Ukraine. I thought I could make two or three times my money if Russia did not invade. Even though Putin was rattling his saber, I thought he would pull back because invading would be reckless and damaging, and he was negotiating. I was dead wrong, and Sberbank went to zero.
It is easy to have a variant perception. It is hard to be right. You had better have a lot of respect and humility about the wisdom of crowds and understand that of every ten variant perceptions you have, maybe one is right, certainly in the investing world. Have that humility and only put your hard earned money, or your investors’ hard earned money, into a situation when you are absolutely confident that you have found the right variant perception.
Value Traps
Well, the bane of every value investors is value traps, which are stocks that never turn around and the worst value traps decline to zero. So Bed Bath and Beyond is a classic one, but there's so many retail and restaurant stocks, companies where the stocks go to zero and think of all the investors who bought them, they once traded a hundred dollars a share, and the value investor comes in at $10 a share, and it's like the stock's down 90%, it can't possibly go down any further. Or I think at that point there's probably a new CEO and the new CEO lays out this amazing plan and it all sounds really good, but they're just being put out of business by Amazon in the case of retailers or paging companies, check printing companies. And so it can be very, very difficult to distinguish between value traps and great buys.
Generally speaking, the worst value traps, the ones that go to zero have a lot of debt. So I'm constantly looking at beaten down stocks, but the key is avoid ones with a lot of debt. Yes, they can be supercharged if they turn because the debt creates leverage to the upside, but it can also mean that they don't survive the trough that they're in and you've got a zero on your hands. And generally, my favorite type of value investment beaten down stock is a very high quality business. I've cited some examples before, but Facebook back in 2022, McDonald's 20 odd years ago, where very, very high quality businesses that are generating a lot of free cash flow and something has impacted the business. Investors are concerned about something, and the key to whether it's a value trap or a great turnaround opportunity is whether the problems that have caused the stock to decline, prove to be temporary or reversible.
So I'm generally looking at self-inflicted problems. So for example, this is going back more than 20 years, but McDonald's had a very rough 2002, they were in a price war with Burger King, the economy was a bit weak, there was concern about people eating more healthily and McDonald's had done a lot of self-inflicted wounds under prior management. They had built too many, they were franchising restaurants that were too close to one another, so they were cannibalizing the business. They had stopped in pursuit of growth, they were handing out franchises to everybody and weren't maintaining quality standards. They had ceased to innovate new foods. And so a new CEO came in, and often that can be a good catalyst for a turnaround, but they've got to be fixable problems. In the case of McDonald's, a new CEO, Jim Cantaloupe came in and developed new salads, all white meat, chicken nuggets, et cetera.
So the McGriddles were a new product and all, so he was doing a lot of new product innovation. He stopped opening up too many new restaurants too close to each other. So the cannibalization issue went away and repaired relationships with the franchisees always something critical in a franchise business. And of course Americans didn't stop eating fast food. This health thing was turned out to be sort of nonsense, and the economy picked up a bit and same store sales reversed and the stock had gone from 45 to 12 and it is been a 20, more than a 20 bagger since then. So compare that to Bed Bath and Beyond, which had a lot of debt. And these leases when anytime you're looking at a retailer, leases are a form of debt and can't be discharged unless you file for bankruptcy and the stocks is zero. And they were just getting pummeled by all sorts of both online. They were getting Amazon for sure, and it was just clear the business was going to continue melting. It wasn't that something that they could just come in and management could fix the business. So those are the ones you want to avoid.
Fixed Income Investing
My fixed income right now is a fair amount of cash. The critical thing is to make sure you are getting a market interest rate on your cash, which is a little over 4 percent today. If you asked me what the S&P 500 will do over the next five years, I might say 5 percent. You can earn about 4.3 percent today taking no risk owning United States Treasuries. So my fixed income is a cash sweep account at Fidelity.
You can go to the opposite extreme and buy a 30 year bond yielding in the high fours, almost 5 percent, because investors are worried about inflation. The Fed can push short term rates down, but long term rates, like mortgages, may not move because investors in long term bonds are concerned about inflation from tariffs and large deficits.
Sometimes I go to TreasuryDirect and buy bonds directly from the United States government as part of an auction. That is a way to buy bonds with no fees. You could buy some one year and some two year bonds. That is called laddering. But I am not a bond guy. I am a stock guy. To the extent my money is not in stocks, either via index funds or a handful of stocks I pick, I sit and earn north of 4 percent. That is pretty nice income.
Be very careful. You are not getting 4 percent in your checking account. In your savings account at your bank, you might be getting one half of 1 percent. If you have a lot of cash sitting there, get it out and into your brokerage account where you earn the market rate on cash. Two or three years ago, when short term rates were under 1 percent, it did not matter. Today, north of 4 percent is a big deal.
Low-Interest Rate Environment
This was a couple of years ago. Stocks were cheaper, and I put my money in stocks, so I was not holding a meaningful amount of cash. As the market has risen, trading today close to an all-time high, I have sold a few things and taken cash from maybe 5 percent to 20 percent. Generally speaking, I try to follow one of Buffett’s sayings: “Be fearful when others are greedy and greedy when others are fearful.” So I was putting a lot of money into the market in my personal account at the bottom of the COVID crash and again at the bottom of the 2022 tech crash. But then, as things recover, I do some trimming.
The big mistake most people make is piling in at the top and then panicking and selling at the bottom. The key to long-term success is doing nothing—better than piling in at the top and selling at the bottom. But ideally, you do some trimming, some selling, and raise cash when markets are hitting all-time highs. And then you have the guts to put that money to work when markets tank.
Advice to Retirees
Most importantly, monitor your spending closely. I was just reading an article the other day that said when people think about how much they'll need to retire, they think that they'll only spend 60% of what they were spending. So in other words, their spending will go down by 40%. I don't know, they don't have to pay for gas driving to work or whatever. In reality, the actual numbers of people who have studied this is 97%. In other words, people become accustomed to a certain standard of living and that's what they spend. You've got to make sure the money lasts. And so the first piece of advice would not be related to investing, but related directly to what you can control. And boy, particularly today, it is so easy to let spending get out of control because everything's on your phone, click, click, you've just bought something on Amazon, tap to pay, you've bought that $7 latte, you've booked an expensive trip, et cetera.
So critically by the way, make sure you're not paying any kind of credit card debt or whatever. Get rid of the kind of expenses and the worst expenses are paying 25% to your credit card company. That's madness. Get rid of that and try and whatever your long-term income stream is from social security, from any annuities, that kind of thing, try and live beneath your means, and that's true whether you're in retirement or not, but from day one of your life, the most important thing you can do to achieve long-term wealth and financial security is number one, have a steady every year, have good decent income. You don't need to make a lot of money. My parents are both teachers their whole careers and they've retired comfortably because they both worked not one year in their entire lives did they not have an income, and they squeezed every dollar bill and clipped coupons and wore secondhand clothes and drove secondhand cars, whatever their income was after tax, they lived beneath their means and then they took the savings and they stuck it in retirement accounts. You get all that right. You're 90% of the way there. So long-term financial security does not depend on you finding the next Nvidia that if you look at people who've achieved financial security, that piece of it is the least important. The most important is all the habits you develop and building a career and having a steady job where you're promoted and your income grows and having a spouse, ideally two of you doing it, that's really important too.
So now onto the investment piece of it, it depends on how much money you have. If you don't need to take risk, if you can set aside half your money in a layered bond portfolio, that's going to guarantee you sort of 4% and you can buy a 10-year treasury and give you 4%,. But you probably in your 30 year is giving you almost 5%. That's sort of set aside enough money. If the world goes to hell in a bucket and stocks go down 50% and all, you're still okay. If you have enough money to do that, do that with a portion of your money. If you don't need to take risk, don't take risk when you're talking about your retirement. And then look, the other thing is people start thinking about retirement, call it age 65. I know a lot of people, my parents and myself for example, who I think have a life expectancy of 95 at least.
So you don't want to start drawing down your money thinking because the average person lives into their late seventies, but healthy people can live into their mid nineties. You definitely, you want to think about how to make that money last a good long period of time.
Generally, you don't want to get overly conservative too soon. You don't want to just put all your money in cash. If you're 65 and you're in good health, you should assume you're going to live another 30 years. There has never been a 30 year time period where the S&P 500 hasn't generated positive returns, exceeding bonds and certainly gold and cash and so forth. So you probably just want to shift the ratio somewhat and what that ratio is, again, if you have enough money such that you can keep 80% invested in index funds in stocks, and because 20% is enough to survive, if the world goes to hell and stocks go down 50%, well, if you have enough money, then keep most of it invested in equities and again, stick to index funds and so forth, and you can ride it out. If you're a little tighter, you might want to start shifting. And the nice thing is you can get more than 4% just on cash right now. So keeping 50% in cash and 50% in stocks if you're 75 years old or something. So the answer is it really, really depends on both what you're spending level is relative to social security and other income streams, but then also what your life expectancy is and how much excess excess you have. If you've got a bunch of excess long-term over decades, you want the vast majority of that in stocks.
Advice on Advisors
My general advice is: do not hire high-fee advisors or pay active managers. Instead, just index. Or, if you want, pick 10 stocks, check them once a year, and make sure they are high-quality businesses. Otherwise, index everything.
My indexing right now is in three buckets. Just a week or two ago, I made a change. I had been holding only SPY, the standard S&P 500 index. But that index has become very concentrated in a handful of stocks. Today, the top 10 stocks account for 40 percent of the index’s value—an all-time high. Nvidia is the largest. Berkshire Hathaway, Visa, MasterCard, Broadcom are in the top 10. Four hundred ninety-six stocks account for 60 percent of the index, while 10 account for 40 percent. Buying the S&P 500 today is really a bet on the Magnificent Seven and a handful of others.
The S&P 500 is also very U.S.-focused. The U.S. is about 23 percent of world GDP but 70 percent of world market cap. That is a huge skew. So here is what I did. In my tax-free accounts, I sold 60 percent of my SPY holdings. I kept 40 percent in the standard S&P 500. I put 40 percent in an equal-weight S&P 500 fund, which owns the same 500 stocks but weights them equally. So a 10 percent move in Nvidia and a 10 percent move in Enphase Energy (the smallest stock in the S&P 500, with a $4 billion market cap) have the same effect. With SPY, Nvidia’s movements matter 1,000 times more than Enphase’s. The standard S&P 500 today is effectively a large-cap growth index. Equal-weight balances it.
Then I took 20 percent and put it in a Vanguard Global Index ETF. So I am still fully indexed, totally low fee. But instead of 100 percent SPY, I am now 40 percent SPY, 40 percent equal-weight S&P 500, and 20 percent international.
The average person is better off with no advisors, no high fees, and simply indexing. You can break it into three buckets like I have, or keep it all in SPY. If you want to pick a handful of stocks, stick to high-quality businesses, understand them, and hold them for years. A 10-stock portfolio, if you know what you are doing, might even beat the S&P 500.