Charlie Munger CNBC Interview 2019 Full Video, Full Transcript, and Notes

Posted on March 12, 2019 // Leave a Comment

Here’s another Charles T. Munger interview (last one for a while, I promise!) for those of you that share a peculiar fondness for hearing someone encourage rationality, patience, and self-discipline. After the Daily Journal 2019 annual meeting, Munger did a 30-minute interview with Becky Quick of CNBC. (See similar Buffett CNBC interview.) I guess they forgave Munger’s jabs at Jim Cramer, as they posted the entire interview online along with a full transcript.

I’m going to be honest, I didn’t get as many gems out of this interview as some of his other stuff. Here was my favorite part.

The secrets to life can also fit on an index card? As Munger noted earlier, “If it’s trite, it’s right”. We’ve seen personal finance advice fit on an index card, so why not life advice as well?

BECKY QUICK: Charlie, so many of the people who come here come because they’re looking for advice not on business or investments as much as they’re looking for just advice on life. There were a lot of questions today, people trying to figure out what the secret to life is, to a long and happy life. And– and I just wonder, if you were–

CHARLIE MUNGER: Now that is easy, because it’s so simple.

BECKY QUICK: What is it?

CHARLIE MUNGER: You don’t have a lot of envy, you don’t have a lot of resentment, you don’t overspend your income, you stay cheerful in spite of your troubles. You deal with reliable people and you do what you’re supposed to do. And all these simple rules work so well to make your life better. And they’re so trite.

BECKY QUICK: How old were you when you figured this out?

CHARLIE MUNGER: About seven. I could tell that some of my older people were a little bonkers. I’ve always been able to recognize that other people were a little bonkers. And it helped me because there’s so much irrationality in the world. And I’ve been thinking about it for a long time, its causes and its preventions, and so forth, that I– sure it’s helped me.

Filed Under: Inspirational, Investing //

Charlie Munger Daily Journal Annual Meeting 2019 Full Video, Full Transcript, and Notes

Posted on March 11, 2019 // 1 Comment

If you like hearing Warren Buffett and Charlie Munger talk at the Berkshire Hathaway (BRK) annual meeting, you should also watch or listen to Charlie Munger at the Daily Journal (DJCO) annual meeting. DJCO is his personal pet project, and I feel like he lets loose more at this meeting than at BRK. For 2019, CNBC broadcast the entire 2-hour Q&A session online. Latticework Investing generously shares a full transcript as well. I choose to listen to this over any finance-related podcast.

Here are my personal notes and highlights:

Think for yourself.

[…] my definition of being properly educated is being right when the professor is wrong. Anybody can spit back what the professor tells you. The trick is to know when he’s right and when he’s wrong. That’s the properly educated person.

Index funds have become more and more successful for a simple reason. The evidence is getting stronger over time that they provide better long-term performance due to lower costs and better tax-effeciency.

Another issue of course that’s happened in the world of stock picking, where all this money and effort goes into trying to be rational, is that we’ve had a really horrible thing happen to the investment counseling class. And that is these index funds have come along and they basically beat everybody. And not only that, the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in investments. So you have a whole profession that is basically being paid for accomplishing practically nothing. This is very peculiar. This is not the case with bowel surgery or even the criminal defense bar in the law or something. They have a whole profession where the chosen activity they’ve selected they can’t do anything.

[…] I don’t have any solution for this problem. I do think that index investing, if everybody did it won’t work. But for another considerable period, index investing is going to work better than active stock picking where you try and know a lot.

If you are trying to beat the indexes, you need LESS diversification, not more. Wait for a few fat pitches and don’t hesitate to swing. This isn’t as widely known, but Munger’s personal portfolio is roughly 1/3rd Berkshire Hathaway stock, 1/3rd Costco stock, and 1/3rd invested in Li Lu, an investment manager based in China.

But the whole trick of the game is to have a few times when you know that something is better than average and to invest only where you have that extra knowledge. And then if you get just a few opportunities that’s enough. What the hell do you care if you own three securities and J.P. Morgan Chase owns a hundred? What’s wrong with owning a few securities?

[…] So the whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task.

Now at a place like Berkshire Hathaway or even the Daily Journal, we’ve done better than average. And now there’s a question, why has that happened? Why has that happened? And the answer is pretty simple. We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. (laughter) We always realized that if we worked very hard we can find a few things where we were right. And that a few things were enough. And that that was a reasonable expectation.

Avoid any pitches that promise easy money from stock-picking. Penny stocks, day-trading, trends, charts. All of them.

Then if you take the modern world where people are trying to teach you how to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin. It is really stupid. And when you’re already rich to make your money by encouraging people to get rich by trading? And then there are people on the TV, another wonderful place, and they say, “I have this book that will teach you how to make 300 percent a year. All you have to do is pay for shipping and I will mail it to you!” (laughter) How likely is it that a person who suddenly found a way to make 300 percent a year would be trying to sell books on the internet to you! (laughter) It’s ridiculous.

Have modest expectations in stock market returns.

Well, my advice for a seeker of compound interest that works ideally is to reduce your expectations. Because I think it’s going to be tougher for a while. And it helps to have realistic expectations. Makes you less crazy. I think that…you know they say that common stocks from the aftermath of the Great Depression, which was the worst in the English speaking world in hundreds of years, to the present time may be an index that’s produced 10 percent. Well that’s pre-inflation. After inflation it may be 7 percent or something. And the difference between 7 and 10 in terms of its consequences are just hugely dramatic over that long period of time. And if that’s 7 in real terms, but achieved starting at a perfect period and through the greatest boom in history, starting now it could well be 3 percent or 2 percent in real terms. It’s not unthinkable you’d have 5 percent returns and 3 percent inflation or some ghastly consequences like that. The ideal way to cope with that is to say, “If that happens, I can have a happy life.”

Be very careful about who you chose to partner up with in your life.

We all know people that are out married, I mean their spouses are so much better. Think of what a good decision that was for them. And what a lucky decision. Way more important than money. A lot of them did it when they were young, they just stumbled into it. Now you don’t have to stumble into it, you can be very careful. A lot of people are wearing signs, “Danger. Danger. Do not touch.” And people just charged right ahead. (laughter) That’s a mistake. Well you can laugh but it’s still a horrible mistake.

On becoming rich.

This business of controlling the costs and living simply, that was the secret. Warren and I had tiny little bits of money. We always underspent our incomes and invested. And if you live long enough you end up rich. It’s not very complicated.

“If it’s trite it’s right.”

I think personal discipline, personal morality, good colleagues, good ideas, all the simple stuff. I’d say, if you want to carry one message from Charlie Munger it’s this, “If it’s trite it’s right.” All those old virtues, they all work.

My general idea is there’s no point in fretting too much about what you can’t fix. It’s a big mistake to fill yourself with resentments and hatreds and so on. It’s such a simple idea but so many people ruin their lives unnecessarily. Envy is such a stupid thing to have because you can’t possibly have any fun with that particular sin. Who in the hell ever had any fun in envy? What good could envy possibly do for you? And somebody is always going to be doing better than you are. It’s really stupid. So my system at life is to figure out what’s really stupid and avoid it. It doesn’t make me popular, but it prevents a lot of trouble.

Filed Under: Inspirational, Investing //

Warren Buffett CNBC Interview 2019 Full Video, Full Transcript, and Notes

Posted on March 7, 2019 // Leave a Comment

I’m one of the many folks who like to keep up with Warren Buffett content to see if there is any wisdom to be gained. After the release of the 2019 Berkshire Hathaway shareholder letter, Buffett did a 2-hour interview with Becky Quick of CNBC. While I don’t like when CNBC encourages average folks to treat investing like sports betting, I do appreciate that they offer up the entire interview online along with a full transcript.

Here are my personal notes after both watching (listening, actually) and then reading the text as well.

If you don’t DIY, the person who manages your money should invest it as they would their own family’s money. Most of Buffett’s and Munger’s family money is invested in BRK stock. Maybe not Buffett’s wife, but their children and grandchildren. That is why Berkshire Hathaway is run with such care and conservatism such that no disaster would make it permanently impaired. This is different from when a CEO has an agreement to make lots of money if the share price goes up in the short-term, and he/she simply jumps ship if things go horribly wrong. Check out this excerpt about the target audience for his shareholder letter:

I’ve always had the image that I am talking to my sisters. I have two sisters. They’re both– Berkshire’s pretty much their whole investment. They’re smart. They’re not active in business. So– they’re not reading about it every day. But I pretend they’ve been away for a year and I’m reporting to them on their investment. And then this year because we may be repurchasing shares, I tried to have the vision that they were talking to me about whether they should sell their shares and I was explaining to them exactly how I would look at it if I were in their shoes. So– it’s, “Dear Doris and Bertie,” at the start and then I take that off at the end. But I’m talking to them. And I’m trying to talk to ’em in a manner where if– you know, they’re practically entirely in Berkshire and if they were thinking of selling some, here’s what I’d want ’em to know before they made a decision.

That is how I try to write this blog. I am telling you my asset allocation, the names of the mutual fund and ETFs that I own, the brokerage accounts that I hold them in, the banks that I keep my cash in, the credit cards that I have applied for and use everyday. These are the same things I would recommend to my parents and siblings (and children eventually). Hopefully, if something happens to me, then my writing here can serve as a resource about what my (their) portfolio is and why I bought them and how they should spend from it. I want my spouse to hopefully keep the faith and allow it to provide for them even if I’m not around.

Even if markets aren’t perfectly efficient, it’s still really hard to beat the S&P 500. In response to a viewer question, Buffett discloses the two men picked to replace him in the stock-picking arena, Ted Weschler and Todd Combs, have lagged the S&P 500 slightly since they started 8 years ago. Yes, this was during a bull market, but they still lagged over a pretty long period. These guys sit around all day reading 10-Ks and were handpicked by Warren Buffett himself! You must ask yourself, do you really think you have an edge on them?

BECKY QUICK: That worked the last 77 years, but there’s a question that came in, T29. This is from Scott Baker. “With so many people in the S&P index funds is it still market neutral and the best investment vehicle for most people?”

WARREN BUFFETT: Yeah, I think it’s the best investment– because most people don’t know how to pick stocks. And– most of the time I don’t know how to pick stocks. I mean, it’s– it is not an easy game. And by definition people are going to do average. I mean, if you take everybody in aggregate, and if half of ’em are paying big fees and jumping around and paying brokerage commissions, the other half have to do better. And– no, it is– as I’ve told people in– and my widow will I’ve instructed– the trustee to put 90% in an S&P 500 index fund and 10% in governments, just so that– just for a feeling of security. But– there’s been no better bet than America. There’s been nothing like it.

Be patient. Be prepared. Buffett is still waiting for an opportunity, probably in the next recession or down part of the economic cycle. One of the things that makes Buffett special is his rationality and patience. Berkshire still has a ton of cash, and he won’t spend it just because talking heads says he should. With the size of their cash hoard, they want to buy an entire business at a good price. However, private equity has too much money to deploy, and is bidding up all the private businesses because they are willing to use leverage. This will eventually change. One day, probably within the next decade, the short-term outlook for businesses will be quite gloomy.

Filed Under: Investing //

Free Morningstar Premium Mutual Fund Reports via Public Library Card

Posted on March 6, 2019 // 16 Comments

Updated 2019. Let’s say you are a DIY investor and doing some research on some mutual funds. You decide to learn more about the Vanguard Intermediate-Term Tax-Exempt Fund. You pull up the Morningstar quote pages (ticker VWITX and VWIUX) and find some useful numbers, plus an analyst report hidden to the public as a “premium” feature.

You see a 14-day free trial and after some more clicking around, you discover that a premium membership to Morningstar costs $199 a year or $24 a month.

mstar_premium2

Now, I’d like to read the rest of that analyst report, but I’m not sure if it is worth the fee. Well, you may already have access to those analyst reports through your payment of local and state taxes. Yup, the good ole’ public library!

Many public libraries have a subscription to what is called the Morningstar Investment Research Center database. Most offer instant, online access via your library card number and PIN. You should look under the “Databases” or “Resources” section. Some only have a limited amount of offsite licenses, so you’ll have to either ask for a password or you’ll have to read them in a branch. Here’s a screenshot of my free report accessed from the comfort of my home, with all the good stuff blurred out of course:

I was also able to access their analyst reports for stocks, mutual funds, and ETFs, as well as the premium version of tools like Portfolio X-Ray.

Now, if your local library system doesn’t provide this access, you can also look at state libraries, university libraries, or other libraries in the region for which you are eligible. Finally, there are some public libraries that offer library cards to non-residents for an annual fee. For example, the Charlotte-Mecklenburg Library in North Carolina offers library cards by mail for $45 a year (Seniors 62+, $35 a year).

Non-residents of Mecklenburg County can obtain a Charlotte Mecklenburg Library card for an annual fee of $45.00. This amount is approximately equal to the annual property tax a Mecklenburg County resident pays to support the Library. A non-resident library card entitles you to the full services of the Library at all locations.

According to their website, they also offer access to the Morningstar database. $45 a year is still significantly less than $199 a year, and there are other library benefits like access to Libby/Overdrive eBooks and RB Digital magazines. However, I would call them to confirm before you plunk down $45 as the services they offer can change at any time.

That is just one example. Here are some more libraries with non-resident borrowing privileges, although I haven’t checked again in 2019 as to whether they offer M* access.

Bottom line. If you want to access reports and information from the Morningstar Premium section, check your local and state libraries to see if you can access it for free with your library card. Some public libraries also offer library cards to non-residents for an annual fee. However, if you are signing up for a specific service like Morningstar, I would call them up first and confirm that they are still offering it for non-resident cardholders before you pay any fees.

Filed Under: Deals & Offers, Frugal Living, Investing //

Personal Finance on a 3×5 Index Card: Classic and New Young Adult Version

Posted on March 5, 2019 // 9 Comments

A few years back, Professor Harold Pollack quipped that everything you really need to know about money fits on a 3×5 index card. Folks asked him to prove it, and the resulting handwritten card went viral. Eventually, the idea became a book cowritten with Helaine Olen called The Index Card: Why Personal Finance Doesn’t Have to Be Complicated. Here is the original photo:

Via Abnormal Returns, I learned that Dr. Pollack recently created a new index card targeted at young adults under 30. Here again is a photo:

In case you can’t make out the handwriting, his tips are as follows:

  • Pay your credit card bill in full every month.
  • Keep a budget and spending diary. Pay cash up front whenever you can.
  • Don’t smoke. Mind your alcohol and dining spending, too.
  • Start saving early. Make it automatic, ideally through a 401(k).
  • If you have a job and no kids, aim to save 20% of pretax income.
  • Invest in low-fee total stock index funds, ideally in a 401(k).
  • Open a Roth IRA if you don’t have access to a 401(k).
  • Don’t buy individual stocks or try to time the markets.
  • Think federal first when borrowing for school. And don’t combine public and private loans if you consolidate.
  • A focused and rigorous major matters more than where you go to college.
  • Don’t push your friends to overspend. And beware the same peer pressures applied to you.

Sound, simple advice. But simple is not easy, and it can be hard to pull off everything on this list. I recommend using the card to help focus your efforts.

Filed Under: Frugal Living, Investing //

Best Interest Rates on Cash – March 2019

Posted on March 4, 2019 // 13 Comments

Here’s my monthly roundup of the best interest rates on cash for March 2019, roughly sorted from shortest to longest maturities. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 3/4/19.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

  • Redneck Bank offers 2.50% APY on balances up to $50,000. CIT Bank Savings Builder is now up to 2.45% APY with a $100 monthly deposit (with no balance limit). There are several other established high-yield savings accounts at 2% APY and up.
  • Got a lot of friends or followers? You can 4.30% APY on up to $50,000 for 30 days via the Empower app, plus another 30 days for each friend that you refer to the. First month is free + 11 referrals = 4.30% APY for a year.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • Purepoint Financial has a 13-month No Penalty CD at 2.60% APY with a $500 minimum deposit. Marcus Bank 13-month No Penalty CD at 2.35% APY with a $500 minimum deposit, Ally Bank 11-month No Penalty CD at 2.30% APY with a $25k+ minimum, and CIT Bank 11-month No Penalty CD at 2.05% APY with a $1,000 minimum. No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Hyperion Bank has a 13-month CD at 3.20% APY ($500 minimum) with an early withdrawal penalty of 3 months of interest.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the money for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 2.46% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.34%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 2.71% SEC Yield ($3,000 min) and 2.81% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.87% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.93% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes.

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 3/4/19, a 4-week T-Bill had the equivalent of 2.44% annualized interest and a 52-week T-Bill had the equivalent of 2.54% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 2.30% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 2.21% SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between November 2018 and April 2019 will earn a 2.82% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-April 2019, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend or use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore, either.

  • The best one right now is Orion FCU Premium Checking at 4.00% APY on balances up to $30,000 if you meet make $500+ in direct deposits and 8 debit card “signature” purchases each month. The APY goes down to 0.05% APY and they charge you a $5 monthly fee if you miss out on the requirements. Find a local rewards checking account at DepositAccounts.
  • If you’re looking for a high-interest checking account without debit card transaction requirements then the rate won’t be as high, but take a look at MemoryBank at 1.60% APY.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going.

  • Hyperion Bank has a 19-month CD at 3.50% APY ($500 minimum) with an early withdrawal penalty of 6 months of interest.
  • Mountain America Credit Union has the following certificate rate: 2-year at 3.25% APY 3-year at 3.35% APY, 4-year at 3.25% APY, 5-year at 3.51% APY ($500 minimum deposit). MACU can be joined via a partner organization for a one-time $5 fee, usually right on the online application. Note: The 2-year and 3-year certificates have an early withdrawal penalty of 180 days of interest, and the 4-year and 5-year certificates have an early withdrawal penalty of a full year (!) of interest.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 2-year non-callable CD at 2.60% APY and a 5-year non-callable CD at 3.00% APY. Watch out for higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10+ years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.25% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher as you extend beyond a 5-year maturity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. As of 3/4/19, the 20-year Treasury Bond rate was 2.93%.

All rates were checked as of 3/4/19.



Filed Under: Banking, Deals & Offers, Investing //

Roth vs Traditional Pretax 401k? Compare With These Example Worker Profiles

Posted on February 26, 2019 // 13 Comments

T. Rowe Price has an article Evaluating Roth and Pretax Retirement Savings Options by Roger Young that covers the basics on the choice between a “Traditional” pretax or Roth IRA or 401k account:

The primary factor to consider is whether your marginal tax rate will be higher or lower during retirement. If your tax rate will be higher later, paying taxes now with the Roth makes sense. If your tax rate will be lower, you want to defer taxes until then by using the pretax approach.

With the Traditional pretax, you get to avoid paying income taxes on the contribution now, but you must pay taxes up on withdrawal. With the Roth, you pay income taxes now, but you don’t own any taxes upon withdrawal. However, I am linking to it because it also includes a table with some sample worker profiles. This may help clarify things for people who are still confused about which to pick.

There are other considerations due to our overly-complex tax code, but I think this is still a helpful tool.

Filed Under: Investing, Retirement, Taxes //

Berkshire Hathaway 2018 Annual Letter by Warren Buffett

Posted on February 25, 2019 // Leave a Comment

Berkshire Hathaway (BRK) has released its 2018 Letter to Shareholders. I highly recommend sitting down and reading the entire thing straight from the source. It’s only 15 pages long and (as always) written in a straightforward and approachable fashion. Here are my notes with quoted excerpts. I’ve also added a “personal takeaway” about how I intend to apply the knowledge to my own life.

Changes in the value of their stock holdings are now reported directly as earnings. This means a drop in stock prices can technically make BRK have a “loss” in any given quarter, even if both their wholly-owned businesses and indirectly-owned stock companies all made profits. This didn’t really matter to me, but mostly it’s just a reminder that he doesn’t view his stock holdings in the same way as the newly-required accounting method.

Personal takeaway: Buffett takes a long-term view of his stock holdings. You should too. The share prices may go up and down, but he knows that he owns solid, profitable companies.

In early 2018, Ajit Jain was put in charge of all insurance activities and Greg Abel was given authority over all other operations. This has been the suspected separation of executive duties, and now it is official. Buffett is still CEO, but they keep moving forward to create a seamless transition for when Buffett is no longer around.

Personal takeaway: Nobody likes to think about death, but proper estate planning shows that you care about your family and loved ones. Do it.

The five groves of Berkshire Hathaway. Buffett discusses how you can organize BRK into five parts:

  1. Non-insurance businesses that BRK controls (ex. 80% to 100% ownership).
  2. Equities (ex. 5% to 10% ownership of a large publicly-traded company).
  3. Non-insurance businesses where BRK shares ownership with other parties (ex. 25% to 50% ownership).
  4. Treasury bill and other cash equivalents.
  5. Insurance companies, which generate free float for investment elsewhere.

Personal takeaway: We are not a business, but I would think of our groves as:

  1. Our human capital. We can work and create income. That has a value.
  2. Private ownership of a small business.
  3. Our common stock holdings (mostly ETFs and mutual funds).
  4. Our bonds and cash holdings.
  5. Our direct real estate ownership.
  6. Our personal insurance policies: disability, term life, home, auto, umbrella liability.

On the use of debt and leverage:

We use debt sparingly. Many managers, it should be noted, will disagree with this policy, arguing that significant debt juices the returns for equity owners. And these more venturesome CEOs will be right most of the time.

At rare and unpredictable intervals, however, credit vanishes and debt becomes financially fatal. A Russian-roulette equation – usually win, occasionally die – may make financial sense for someone who gets a piece of a company’s upside but does not share in its downside. But that strategy would be madness for Berkshire. Rational people don’t risk what they have and need for what they don’t have and don’t need.

Personal takeaway: The last sentence – Rational people don’t risk what they have and need for what they don’t have and don’t need.

On the conservative position of BRK insurance companies:

When such a mega-catastrophe strikes, we will get our share of the losses and they will be big – very big. Unlike many other insurers, however, we will be looking to add business the next day.

Personal takeaway: When the next major economic recession comes, will you be ready to both survive and take advantage? Or is your position too fragile?

As usual, Buffett reminds us about how American capitalism has been powerful over the long run (and owning gold hasn’t), and that paying high fees would have left you with half of what you might have gotten:

Let’s put numbers to that claim: If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.

Personal takeaway: Buy productive assets, and hold them for a long time. Don’t pay high fees to “helpers”.

Past shareholder letters.

Berkshire’s 2019 annual meeting will take place on Saturday, May 4th. Last year, I really enjoyed listening to it in the car via the Yahoo Podcast. Here are the many ways you can access Berkshire Hathaway Shareholder Meeting Full Videos, Transcripts, and Podcasts.

Filed Under: Investing //

Personal Finance: Recognizing Control and Using Your Time Efficiently

Posted on February 21, 2019 // 7 Comments

Morgan Housel wrote a post called The Biggest Returns which really resonated with my outlook on investing and personal finance. The main idea was that you should consider the impact of your efforts in relation to the time and energy spent.

The idea that reducing your needs has the same impact as increasing your income – but the former is more certain and in your control than the latter, so it has a higher expected value – is as true for someone spending $15,000 a year as it is someone spending $15 million per year.

The hard part is becoming satisfied with spending less. […] For me it’s been realizing that what makes people happy is having options – doing what you want, with who you want, when you want, where you want. And options come from savings and assets, which are the opposite of spending.

Stock returns: Limited control. I decided on an asset allocation and invested my money in low-cost, low-turnover investments. Learning about investing and asset allocation initially was a good investment of time, but I still have limited control of the outcome. More importantly, this gave me the conviction and patience that it will work out in the long run. But I still might lose money in any given year, and I can’t just put in more effort and improve that return. I only check in on my portfolio quarterly.

Cash returns: Moderate control. About 1/3rd of my portfolio is in high-quality bonds, which in my definition includes cash and certificates of deposit. Here, I have some more control. For example, if I put money into a 5-year CD at 4% APY, I have high confidence it will do better than a 5-year Treasury bond at 2.50% yield. Sometimes there are such opportunities for the individual investor, sometimes there aren’t. Therefore, I track the best interest rates monthly.

Income: Moderate to significant control. Income is obviously important, and I while would rate it as more important than spending, that doesn’t mean spending in not also very important. There are plenty of people who earn $250k and spend $250k per year, while a $85k earner could spend $60k and save even more. But that same 250k earner has the ability to “see the light” and have their saving explode over the next few years. Unfortunately, there are no easy, foolproof ways to earn a high income. Of course, you should invest in yourself and improve your marketable skills and thus increase your human capital. Some people can move up the corporate ladder, others will do better with a more entrepreneurial route.

Personal spending: Significant control. Managing your spending is all about priorities, but there are two simple ways to attack your spending. First, you could start from the bottom and get rid of the more questionable “wants”: Expensive food habits (coffee, alcohol, snacks), monthly entertainment subscriptions, gambling, etc). Second, you could start from the top and pair down the big “needs”. I could have gotten a mortgage approval for a 3,500 sf house in my neighborhood. I live in a 2,000 sf house. I could pay cash for nearly any vehicle on the market. I bought a used minivan. I could have had fewer kids… Oops!

Credit cards, bank bonuses, and other “found money”: Significant control. You won’t get rich solely from taking advantage of credit card sign-up bonuses, maximizing your cash back, or picking up $10-$100 here and there each week, but I estimate that it adds up to $3,000+ each year for our household. $3,000 is a 5% increase to a $60,000 income, or a free annual vacation. You should pick and choose what works for you; for example I refuse to drive around town (to buy gift cards, redeem coupons, buy and resell, etc). I prefer deals that can be done with just clicks.

This is also a good reminder that even though I might not write about them repeatedly, your biggest returns on effort might be: get a better job, relocate to a city with greater relative opportunity (income vs. cost-of-living), move into a smaller house, and buy a cheaper car (or find cheaper transportation). On a daily basis, the things that catch my eye (and thus what I write about) are actionable ideas where I have control of the outcome.

Filed Under: Frugal Living, Investing //

Best Interest Rates on Cash – February 2019

Posted on February 4, 2019 // 4 Comments

Here’s my monthly roundup of the best interest rates on cash for February 2019, roughly sorted from shortest to longest maturities. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 2/3/19.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

  • Redneck Bank offers 2.50% APY on balances up to $50,000. CIT Bank Savings Builder is now up to 2.45% APY with a $100 monthly deposit (with no balance limit). There are several other established high-yield savings accounts at 2% APY and up.
  • Got a lot of friends or followers? You can 4.30% APY on up to $50,000 for 30 days via the Empower app, plus another 30 days for each friend that you refer to the. First month is free + 11 referrals = 4.30% APY for a year.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • Marcus Bank has 13-month No Penalty CD at 2.35% APY with a $500 minimum deposit, Ally Bank has a 11-month No Penalty CD is at 2.30% APY with a $25k+ minimum, and CIT Bank has a 11-month No Penalty CD at 2.05% APY with a $1,000 minimum deposit. No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Sallie Mae Bank has a 1-year CD at 2.85% APY ($2,500 minimum) with an early withdrawal penalty of 90 days of interest.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the money for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 2.48% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.32%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 2.73% SEC Yield ($3,000 min) and 2.83% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.97% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 3.07% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes.

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 2/1/19, a 4-week T-Bill had the equivalent of 2.41% annualized interest and a 52-week T-Bill had the equivalent of 2.56% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 2.30% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 2.19% SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between November 2018 and April 2019 will earn a 2.82% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-April 2019, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend or use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Signature “credit” purchases of $1,500 or more and a minimum balance of $25.00 at the end of the month is needed to qualify for the 6.00%.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. I don’t use any of these anymore, either.

  • The best one left is Consumers Credit Union, which offers 3.09% to 5.09% APY on up to a $10k balance depending on your qualifying activity. The highest tier requires their credit card in addition to their debit card (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases just above the $100 requirement, as for every $500 in monthly purchases you may be losing out on cash back rewards elsewhere. Find a local rewards checking account at DepositAccounts.
  • If you’re looking for a non-rewards high-yield checking account, MemoryBank has a checking account with no debit card requirements at 1.60% APY.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but some with a early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going.

  • NASA Federal CU has a 15-month certificate at 3.20% APY and a 25-month at 3.25% APY ($10,000 minimum). 182 day early withdrawal penalty. Anyone can join this credit unions with via membership in partner organization (see application). Ally Bank has a 14-month CD at 2.85% APY (no minimum). 60 day early withdrawal penalty.
  • United States Senate Federal Credit Union has a 5-year Share Certificate at 3.53% APY ($60k min), 3.47% APY ($20k min), or 3.41% APY ($1k min). Note that the early withdrawal penalty is a full year of interest. Anyone can join this credit union via American Consumer Council.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 2-year non-callable CD at 2.65% APY and a 5-year non-callable CD at 3.10% APY. Watch out for higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10+ years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.35% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher as you extend beyond a 5-year maturity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. As of 1/9/19, the 20-year Treasury Bond rate was 2.86%.

All rates were checked as of 2/3/19.



Filed Under: Banking, Deals & Offers, Investing //

Historical IRA Contribution Limits 2009-2019

Posted on January 28, 2019 // 3 Comments

ira_heartIndividual Retirement Arrangements (IRAs) are way to save money towards retirement that also saves on taxes. For 2019, the annual contribution limit for either Traditional or Roth IRAs increased to $6,000 (it is roughly indexed to inflation). The additional catch-up contribution allowed for those age 50+ stays at $1,000 (for a total of $7,000). You can’t contribute more than your taxable compensation for the year, although a spouse can contribute with no income if the other person has enough income.

Historical limits. Since I enjoy visual aides, here’s an updated historical chart and table of contribution limits for the last 11 years. I’m happy to say that we’ve both done the max since 2004. Consistently saving for a decade can result in some fat nest eggs!

Year IRA Contribution Limit Additional Catch-Up Allowed (Age 50+)
2009 $5,000 $1,000
2010 $5,000 $1,000
2011 $5,000 $1,000
2012 $5,000 $1,000
2013 $5,500 $1,000
2014 $5,500 $1,000
2015 $5,500 $1,000
2016 $5,500 $1,000
2017 $5,500 $1,000
2018 $5,500 $1,000
2019 $6,000 $1,000

 

Traditional IRAs. If you are covered by a retirement plan at work, deductibility of your contribution to a Traditional IRA is based on your modified adjusted gross income (MAGI) and tax-filing status. See the IRS page on IRA deduction limits. However, there are no income restrictions as to who can contribute to the full contribution limit for a Traditional IRA.

Roth IRAs. It doesn’t matter if you are covered by a retirement plan at work for the Roth IRA, and contributions to a Roth are never deductible (but they aren’t taxed on upon qualified withdrawal). However, the contribution limit and overall eligibility may be capped based on your modified adjusted gross income (MAGI) and tax-filing status. See the IRS page on Roth IRA contribution limits. But wait… high-income earners may be able to get around these income restrictions with a Backdoor Roth IRA (non-deductible Traditional IRA + Roth conversion). Yeesh, I really wish they would simplify all this stuff.

Saver’s Credit. If your income is low enough (less than $63,000 AGI for married filing joint), the Saver’s Credit can get you back 10% to 50% of your contribution (of up to $2,000 per person) when you file your taxes.

Also see: 401k, 403b, TSP Historical Contribution Limits 2009-2019

Sources: IRS.gov, IRS.gov COLA Table [PDF]

Filed Under: Investing, Retirement //

401k, 403b, TSP Historical Contribution Limits 2009-2019

Posted on January 28, 2019 // 4 Comments

401k_limitsEmployer-based retirement plans like the 401(k), 403(b), and Thrift Savings Plan are not perfect, but they are often the best available option to save money in a tax-advantaged manner. For 2019, the employee elective deferral (contribution) limit for these plans increased to $19,000 (it is indexed to inflation). The additional catch-up contribution allowed for those age 50+ stays at $6,000 (for a total of $25,000).

Here’s a historical chart of contribution limits for the last 11 years (2009-2019).

Year 401k/403b Elective Deferral Limit Additional Catch-Up Allowed (Age 50+)
2009 $16,500 $5,500
2010 $16,500 $5,500
2011 $16,500 $5,500
2012 $17,000 $5,500
2013 $17,500 $5,500
2014 $17,500 $5,500
2015 $18,000 $6,000
2016 $18,000 $6,000
2017 $18,000 $6,000
2018 $18,500 $6,000
2019 $19,000 $6,000

 

The limits are the same for both Roth and “Traditional” pre-tax 401k plans, although the effective after-tax amounts can be quite different. Employer match contributions do not count towards the elective deferral limit. Curiously, some employer plans set their own limit on contributions. A former employer of mine had a 20% deferral limit, so if your income was $50,000 the most you could put away was $10,000 a year.

For 2019, the maximum contribution limit when you include both employer and employee contributions is $56,000, an increase of $1,000. The employer portion includes company match and profit-sharing contributions.

The employee salary deferral max limit applies even if you participate in multiple 401k plans.

Sources: IRS.gov, IRS.gov COLA Table [PDF], IRS on multiple plans.

Filed Under: Investing, Retirement //
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