Mathematical Attraction Of Stocks Belies Risk Of Ruin

That’s why the “safe withdrawal rate” is 4% and not 10%.

{{ Suppose that you had invested your wealth in a broadly diversified set of stocks, starting in January 1871, with the dividends being rolled back into your portfolio, and with your portfolio being rebalanced every January to maintain diversification. If you had also paid no taxes and incurred no fees, you would have had 65,004 times your initial investment, as of this past January. By contrast, if you had performed the same experiment with long-term U.S. Treasury bonds, you would have only 41 times your initial wealth. That is the difference between an average annual inflation-adjusted return of 7.3% for stocks and 2.5% for bonds—4.8 points per year, or what Rajnish Mehra and Edward C. Prescott called the “equity premium puzzle.” }}

I-Bonds are the worst performing thing in my portfolio over the past 30 years.

And that “no taxes and no fees” (i.e. “minimizing the skim”) is vitally important. That’s why Warren Buffett’s Berkshire Hathaway is such genius and doesn’t pay a dividend.



Yogi Berra says that in theory practice and theory are the same but in practice they are not. Rebalancing requires you to cut your flowers and water your weeds, the exact opposite of what Peter Lynch recommends. One thing about Warren Buffett that most if not all miss is his method of getting around financial regulations. His fund – Berkshire-Hathaway is legally a regular business corporation free of the pesky financial regulations that supposedly protect investors.

The article mentions Edgar L. Smith’s Common Stocks as Long-Term Investments. Great read! Smith set out to prove the conventional wisdom that bonds are better investments than stocks and the data he collected proved the conventional wisdom wrong! For his efforts Benjamin Graham accused Smith of causing the 1929 bull market and following crash by encouraging speculation.

The Captain

1 Like

Berkshire is not a “fund” in any way. You can’t send them money to manage for you!!!


What are you talking about? BRK has the same level of regulation as any other publicly-traded Fortune 500 company. It just wisely declines to pay a dividend since most of its shareholders prefer not to get the recurring taxable income. Much better to leave it invested internally without the tax hit.



Absolutely correct as viewed from the outside. The view from the inside is much more interesting. See more below.

Absolutely correct as viewed from the outside. The view from the inside is much more interesting.

In another thread I’m accused of refusing to change my mind

I have to admit that my view of Warren Buffett’s Berkshire-Hathaway is not my own. Someone presented it and it made absolute good sense after all the other stuff I had read about Warren Buffett. To figure out investing in the stock market I read books by and about the successful practitioners of the art, Buffett, Lynch, and many more. They all contributed in one way or another. Climate and Gaia are no different. When the science is convincing and does not clash with other human forces like lucre and power then there is good reason to trust the science. Climate Alarmism does not pass the Lucre and Power tests. Nor the FEAR test! Extinction? Hell, Fire and Brimstone? Sure!

Back to Buffett

Warren Buffett started his professional life by creating a private investing fund that limited it to 100 investors. After a few years it hit its upper limit but Buffett had greater ambitions. His conundrum, how to create a much larger fund without the handicaps of excess regulation? One lesson Buffett learned early on was that to succeed really big he needed OPM, other people’s money. Running a fund was one way but the private fund proved limiting. A public fund had too many regulations. What other vehicle was there to legally meet Buffett’s requirements? Less regulation, OPM, and control over cash? A regular joint stock corporation. After Buffett returned the money to the investors of his second or third fund claiming there was nothing in the market worth investing in, he bought Berkshire-Hathaway, one of his worst investing mistakes. But he made a great discovery, a regular corporation can be run as in investment fund without the pesky regulations that burden fund managers. His great secret in the open for all to see and miss!

Some of his capital goes to buying public shares. Some of it goes to buying whole companies. Some of it goes to making deals like saving GE and banks from their own folly. For this discussion the whole company part is the most interesting.

Warren Buffett is a hands-off owner with one exception. He buys good companies and he wants the previous owners to stay on board and keep on doing what that have successfully done all along, with one exception. This is very different from the destructive manipulation described in Barbarians at the Gate. Buffett wants two things, the regular profits the acquired companies have generated all along and their working capital to use to buy even more shares and more companies to fulfill the objective of investment funds, banks, and brokerage houses, assets under control.

The ‘one exception’ is their working capital. Every company needs a pool of working capital much of which is often under the label of Cash equivalents and Marketable securities which are not needed for day to day operations. These Cash equivalents and Marketable securities are the new OPM that Buffett controls and uses to invest.

Current assets:

Here is the general order of accounts within current assets:

  • Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency.
  • Marketable securities are equity and debt securities for which there is a liquid market.

The reason to decline paying dividend is because it would shrink Buffett’s investing OPM resources! Buffett’s secret is ‘float’ and ‘OPM.’

This is how a regular conglomerate can be legally run like an investment fund.

o o o o o o o o o o o o o o o o o o o o o o o o o

My source…

In the world of investing, the name Warren Buffett is synonymous with success and prosperity—now you can learn how Warren Buffett did it and how you can, too.

Building from the ground up, Buffett chose wisely and picked his stocks with care, in turn amassing the huge fortune for which he is now famous. Mary Buffett, former daughter-in-law of this legendary financial genius and a successful businesswoman in her own right, has teamed up with noted Buffettologist David Clark to create Buffettology, a one-of-a-kind investment guide that explains the winning strategies of the master.

The Captain