I often write on Quora.com, where I am the most viewed writer on financial matters, with over 582.1 million views in recent years.
In the answers below I focused on the following topics and issues:
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Many people had forgotten about 2008 until this week.
Or the 2007 Northern Rock bank run in the UK.
Bank crisis are periodic.
In comparison, when was the last time you watched the news and heard “Interactive Brokers is about to implode and needs a bailout”?
Or such and such an investment platform requires government help?
Banks take in other clients money paying them as little as possible, then try to charge people as much as possible for taking out loans.
It is always built on confidence. If too many people take out money, then the whole thing can collapse.
In comparison, if you are owning an asset such as stocks or bonds on an investment platform, that platform doesn’t usually have the same leveraged model.
In fact, some investment platforms have zero debt, and even if they go bust, which is less likely than the leveraged-fulled banks, you still own the assets.
Likewise, owning physical assets such as real estate only depends on leverage in so far as mortgages is concerned.
If your mortgage lender goes bust, you merely have to repay the loan in another way, as part of the administration process, which might result in another bank taking off the debt book.
You still own the property.
That isn’t to mention the following risks:
I am not saying don’t put any money with banks.
Every individual and business needs liquidity.
Some of the larger banks are also probably safer if the governments thinks they are too big to fail.
It is merely wrong to think it is a “safe” option all the time.
It is also wrong to assume the government will always rescue bank account holders.
Any profession where the pay is huge, and those returns aren’t based on the market.
An example is being a dictator:
You might find it ridiculous that footballers get paid a lot, but the market has ultimately decided that only a select few in that industry will make a fortune, and everybody else will struggle.
Look at a sport like tennis. A few make hundreds of millions over a career.
The number 100 player struggles to make a living. In most industries, even non-lucrative ones, being the number 100 means being very well paid.
I am sure there are more than 100 people in education being paid $1m+ a year, and much more than 100 used car salesmen making the same.
Those professions that seem to have ‘unreasonable’ compensation often just reward those who took huge risks.
In the modern world, most wealthy people come from the working or middle-classes.
This is especially the case in the developing world.
Many of those 91% of Chinese wealthy people experienced poverty for themselves, or saw their parents in poverty.
Even in a country like the UK, most wealthier people come from ordinary backgrounds.
Think about most sports, entertainment and business ‘stars’ you know and where they came from.
Therefore, empathy is perhaps higher than you might assume.
JPMorgan Equity Premium Income ETF (JEPI).
It is currently offering a dividend of over 12% per year.
The volatility is low and it has outperformed recently.
However, remember some of the negatives such as
Let’s not forget as well, it is an actively managed ETF.
These ETFs can do well when they are small.
Sometimes they become a victim of their own success, because as they get bigger, it gets harder to maintain performance.
Therefore, ETFs like this might be good in the present environment, but they won’t be good “forever” relative to the market.
Even for retirees, if you compare those who are in dividend ETFs compared to accumulation, it makes no difference.
If you think about it, if a firm pays out dividend, they can’t reinvest as much for capital growth.
Some of the best performing stocks such as Amazon have paid little to no dividends.
That doesn’t mean dividends are bad. They have accounted for 30%-70% of most stock market indexes returns.
Take the FTSE 100 for example:
Yet they aren’t a free lunch.
So, it doesn’t make sense to focus 100% on dividend-paying stocks.
Judging by the responses below, this question was asked more than 3 years ago, either during the start of Covid-19 or before.
On average, stock markets have been up in the last three years, despite the ups and downs.
If you include dividend reinvestment, the results are better still.
You weren’t to know that when this question was asked though.
The wider question is does Buffett’s statement make sense?
The simple answer is it does unless:
Consider this
People will line up for a sale:
Yet when stock markets fall they run for the exits, when the opposite should happen.
You are now able to buy smaller portions of the same businesses for less money.
Let’s put this another way.
If you owned farmland worth $500,0000, which was giving you a $50,000 income per year, would you want to sell if the price of that land went down to $400,000?
If you owned a private business, would you sell out just because somebody put a lower value on it?
99% of people would say no.
Remembering that stocks are just pieces of businesses you are owning for the long-term can help here, as can remembering that markets have always recovered historically.
Netflix did a show recently about “dirty money”.
One episode focused on HSBC’s lax money laundering standards:
Everybody was acting like it was a big surprise.
In reality, banks make a lot of money from your money through various means.
It isn’t worth their while to accept 100k from a potential dirty money source, but they are more likely to take hundreds of millions.
The fines they pay are lower than changing their processes and not making money from those huge deposits.
Once I spoke to a client of mine who is a lawyer who focuses on market entry.
He said to me “I hate governments and the banks”.
The reason? The hypocrisy and what he has seen.
Another “dirty tactic” that many banks play is to do “security calls” with clients who are investing in alternative products, and then the sales team calls the customer later on speaking about alternatives.
Isn’t a big deal if the person knows the game.
Some people are naive enough to think the bank is looking after their interests and trying to prevent scams, when often it is self-interest.
So, these things shouldn’t be seen as big revelations, as the big banks are really just looking after their own interests.
So, you can’t completely eliminate risks.
You can dramatically reduce them to such a level where you are using strategies where nobody has previously lost money employing the same tactics in the past.
The question is also how much risk do you want to take off the table, because it can lower your returns.
Take the traditional 60%-40% portfolio – 60% in the stock market and 40% in bonds.
Seldom has this asset allocation been down by over 20% in a given year:
Yet long-term, it loses big time to a 100% stock market portfolio:
100% in the stock market isn’t that risky either, provided you:
Take the S&P500 as an example.
If safety is your number one concern, then just investing long-term and being as diversified as possible makes sense.
You might have to reduce your expected returns a bit though.
Want something that will make you laugh?
Everybody gets things wrong though.
So, perhaps this was a one-off, or for every one prediction like this, he gets nine right?
Well, I am not picking on Cramer per see, but studies have shown that you wouldn’t make more money listening to most analysts than buying and holding the market.
The problem is, buy and hold is boring advice.
Even buy and hold with some caveats is boring.
TV is about entertainment, so unless you are somebody as credible as Buffett, you won’t be allowed on giving boring but effective advice.