Wisdom Auwisdom augustust 2013

7/27/2019 Wisdom Auwisdom augustust 2013

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REVEAL THEIRMONEY $ECRETS

WARREN

BUFFETTAND 11OTHER

WEALTHWIZARDS
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For the Forbes specialSummer Investment Guide we decided to interview some of the most success-

ful, accomplished people in the world of money and investing. Im talking about thought leaders

like Warren Buffettperhaps the greatest investor everbrilliant Yale economist Robert Shiller,

hedge fund titan Julian Robertson and Vanguards Jack Bogle.

We wanted to know their secrets: What money advice did they get that helped make them become

great in their respective fields? What is their best advice for others?

In this special report you will find the priceless money wisdom the Forbes team extracted from 12

experts. Some of it, such as the blunt comment from Columbia Business School professor Bruce Greenwald

about the importance of other peoples money or Random Walk economist Burton Malkiels stock picking

success story, will surprise you. Other advice may cause you to re-think your approach to building wealth.

WARREN BUFFETTCEO, BERKSHIRE HATHAWAY

Do you have enough cash yet? Warren Buffett, the third-richest person in the world, says

that he had all the money he needed by age 25, when his net worth reached $200,000.

Money has given me the independence to do what I love daily. Beyond that it has no

real utility for me but enormous utility for others. That is why Im giving it away, says

Buffett, 82.

Indeed, Warren Buffett has joined pal Bill Gates and 112 other billionaires in The

Giving Pledge, a rarefied group that has committed to giving the bulk of their fortunes

to charity. So far Buffett has dispensed with more than $17 billion.

When asked what the best money advice he ever got was, its no surprise that Buffett turned to his holy

bible, The Intelligent Investor, written in 1949 by value god Benjamin Graham. "Chapters 8 and 20 have been the

bedrock of my investing activities for more than 60 years, he says. I suggest that all investors read those

chapters and reread them every time the market has been especially strong or weak.

Heres the Twitter-generation version of what is contained in those two chapters:

Dont let the mood swings of Mr. Market coax you into speculating, selling in panic or trying to

time the market.

Only after careful analysis of a companys ongoing business and its prospects for future earnings should

you consider buying it and then only if its current price incorporates a significant margin of safety.

It boils down to avoiding losses by owning only stocks selling well below your calculation of their fair or

intrinsic value. After that, the key is to keep your emotions in checkand be patient.
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JACK BOGLEFOUNDER, THE VANGUARD GROUP

In 1949 Jack Bogle was a Princeton student working a summer job as a runner at a

Philadelphia brokerage firm when an older runner took him aside and said, Bogle, I

want to give you the best stock market advice that you ever had in your life: Nobody

knows nothing. And it was the best advice, since it served as the quasi-inspiration

for his creation of the first stock market index mutual fund in 1975. If nobody knowsnothing, you own everything,he reasoned.

The index fund and the 84-year-old Bogles unwavering commitment to low-cost,

long-term index investing helped Vanguard grow into the worlds largest mutual fund

company. The twin ideas are also at the heart of his advice for young investors who want to get rich: Save early

and regularlythrough a 401(k) or IRA, and put most of your money in a low-cost stock index fund. That way,

he says, you benefit from the magic of compounding returns without having them destroyed or severely

eroded by the tyranny of compounding costs.

Bogle, who grew up poor in the Depression, says he thinks about money as existing on three levels: enough

for a decent living, enough for the pursuit of happiness and a final level of even greater wealth that shouldnot be about flagrant and conspicuous consumption but about helping those less fortunate. Our Founding

Fathers would have been appalled at the gross excesses of todays society.

GARY SHILLINGECONOMIST; EDITOR, GARY SHILLING'S INSIGHTS

Play in your own sandbox, says economist and longtime Forbes columnist Gary

Shilling, known for his prescient predictions of the demise of the housing bubble and

for riding long bonds for three decades of the most profitable bond bull market inhistory. The biggest mistake people make is when they get stars in their eyes about

the killing someone else has made. Thats what fueled the dot-com bubble and

prompted people to own a half-dozen houses.

Shilling, 76, likes to tell younger people the tale of the 1911 race to the South Pole

between Great Britains Robert Falcon Scott and Norways Roald Amundsen. The

Norwegian adapted many techniques already in use by Inuit Eskimos in the Arctic, including sealskin clothing

worn inside out so the hairs wicked away moisture and kept his men warm and dry. He used sled dogs and fed

on seals and penguins along the way. By contrast, Scott bet on the superiority of modern science. After all,

Great Britains technology had been instrumental to its world dominance.Says Shilling, Scott used crawler tractors, which either sunk in the ice or were abandoned. He took Siber-

ian ponies, which breathe and sweat through their skin. They promptly got ice sheets on them and died.

Norway planted its flag first with no casualties. The entire British team perished.

The point is, not everyone is Nobel Prize quality, says Shilling. Dont try to reinvent the wheel. Most

of us will be better off in terms of what we can do for the world by just intelligently and efficiently applying

what is already well known.
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MEREDITH WHITNEYFOUNDER, MEREDITH WHITNEY ADVISORY GROUP

You cant make money if you owe money. Thats the advice banking analyst Mered-

ith Whitney got from her grandfather, to whom she dedicates her new book, Fate of the

States (Portfolio, 2013). Leverage is something Ive never been very comfortable with.

Whitney, 43, is still pounding the table about the financial crises facing states like

California, Illinois and New Jersey. They are all struggling under the weight of bloatedmunicipal governments with gigantic pension liabilities. She says many states have

staved off bond defaults only by cutting services in areas like education, health care and

infrastructure, andof courseby raising taxes. But as citizens assess their priorities

and governments examine their finances, Whitneywho defines money as freedomexpects more defaults to

occur. I dont feel that a bond obligation is any more morally valuable than a kids right to education or

someones right to have a call answered if their house is on fire.

Whitney advises muni investors to focus on those fly-over states where a manufacturing revival is already

under way: North Dakota, Indiana and Texas.

Getting rich starts with having a long-term plan and realistic goals. A lot of people dont have a plan,she says. And when it comes to picking investments she warns, There is nothing emotional about money; you

need to have a sound basis for what you buy or own.

LEON BLACKFOUNDER, APOLLO GLOBAL MANAGEMENT

Just before he graduated from Harvard Business School in 1975, private equity titan

Leon Blacks father passed away, and he inherited $75,000 in life insurance money.

I got involved trading commodities. I went into copper. I went into cattle,sugar, soybeans, says Black, 61. Id never made this much money so quickly. At

one point I was up $600,000 to $700,000. I said Boy, isnt this a fabulous thing?

This is fun, and this is easy!

Then prices plummeted, and for three days he was unable to sell. He lost all but

$25,000 of his original capital. There I was, a Harvard Business School graduate, and

I lost two-thirds of my inheritance, says Black. The money lessons were abundant. Know what you are doing,

avoid get-rich-quick schemes, do your homework, dont bet the ranch, says Black, now worth $4.3 billion. I

felt pretty silly.

Its impossible to overemphasize the importance of starting on the right trackBlack worked early atDrexel Burnham Lambert with junk bond wizard Michael Milken. Start your career in a place where there is

a lot of action, a lot of smart people who understand risk and reward, and work hard. Learn to be patient, and

learn to be opportunistic.
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BURTON MALKIELECONOMIST, PRINCETON UNIVERSITY

While there are some Warren Buffetts in the world, says Princeton economist Burton

Malkiel, identifying one is like finding a needle in a haystack. I saybuy the haystack.

Malkiel is referring to the get-rich-slowly strategy of regularly investing from a young

age in a portfolio of broad, globally diversified stock index funds, easily accomplished

using ETFs. The only thing Im absolutely 100% sure of is that the lower the fee I payto the purveyor of the investment service, the more there is going to be for me. And

thats why index funds work.

Still, the efficient-markets dean and author of the classic bookA Random Walk

Down Wall Streetadmits that his best investment return ever came from picking a single stockprecisely what

he preaches against doing.

Says Malkiel, 80: I had gotten out of the Army with $2,000, and my father told me to invest it. Malkiel

had been a finance officer and had worked on early IBM computers. Using a bit of what would later become known

as Peter Lynch buy what you know stock picking, he put all $2,000 into IBM in 1958. Today its worth almost

$500,000, he says, but is quick to add, It was the wrong thing to do, because a friend at the time urged me to put themoney into a blue-chip stock like Eastman Kodak. Had I done so I would have lost all my money.

JU LIAN ROBE RTSONFOUNDE R, T IGER MANAGEME NT

Hedge funds are the antithesis of baseball, says Julian Robertson, 80, billionaire

founder of one of the most successful hedge funds ever, Tiger Management. In

baseball you can hit 40 home runs on a single-A-league team and never get paid athing. But in a hedge fund you get paid on your batting average. So you go to the worst

league you can find, where theres the least competition.

This rule has guided Robertsons investing strategy and is a big reason he has found

some of his best ideas buying into forgotten markets, which he thinks are mostly in

emerging countries today. Says Robertson, I suppose if I were younger, I would be

investing in Africa.

One emerging economy Robertson has a big stake in is New Zealand, where he owns vineyards, farmland

and three world-class golf resorts.

Ironically, it was a rash decision in 1978 to take a sabbatical from the brokerage business and move to NewZealand to pen an autobiographical novel, his wife and two young children in tow, which resulted in starting Tiger.

Two years later Robertson gave up writing to return to Wall Street.

The best money advice he ever got came from his father, a textile executive in North Carolina, who advised

him to save to build up capital and to move to New York City to train on Wall Street. Robertson also stresses the

importance of understanding numbers. Accounting was the course that helped me more than anything.



BARRY STERNLICHTCEO, STARWOOD CAPITAL GROUP

Pay attention to the big themes, because thats what will help you earn ten times your

money, says real estate mogul Barry Sternlicht, who initially built his hotel empire by

scooping up the commercial loans of distressed savings and loans at crisis-related gov-

ernment auctions in the early 1990s. But, warns Sternlicht, if you focus too much on the

micro, then you can be obliterated by the macro and vice versa.Recently Sternlicht, 52, has been taking advantage of another big fire sale and recov-

ery theme, as his Starwood Property Trust REIT bought one of the largest managers of

distressed commercial real estate, LNR Property LLC, for $1 billion in January.

Sternlicht, who earned a liberal arts degree from Brown University before getting his M.B.A. from Harvard,

claims that another key to success is to remember that you dont know anything ever and that you have to be willing

to change your mind. As the facts change, he says, change your thesis. Dont be a stubborn mule, or youll get killed.

He mentions a Miami condo deal he recently passed on. I wanted desperately to be in Miami, then my

staffers told me that there are 130 projects under construction. So I changed my mind.

Another important tactic has been to study outliers, rather than eliminate them, as the statistically mindedmight recommend. You can learn everything that there is to know about the industry or the player from the com-

pany that is performing better or worse.

BRUCE GREENWALDFINANCE PROFESSOR, COLUMBIA BUSINESS SCHOOL

Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, resul

happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six,result misery.

Renowned value investing professor Bruce Greenwald has committed those words

referring to David Copperfields feckless optimist Wilkins Micawberto memory. Micaw-

ber lives beyond his means and ends up in debtors prison. For a college professor who consults

regularly with the worlds top hedge fund managers and is often referred to as the guru to Wall

Street gurus, remembering to keep ones spending in checkisnt always so easy.

Greenwald, 67, has two constructive pieces of advice for those seeking to become truly wealthy. First, you

have to be very concentrated, develop an expertise like many entrepreneurs do. For investors it means being

willing to take concentrated positions. He notes that in Warren Buffetts early years he developed an expertiseanalyzing insurance companies.

Secondly,you have to get your hands on somebody elses money, he says bluntly. You need some kind

of safe leverage, not borrowed money to be called.

To me money is absolutely irrelevant, exclaims Greenwald loudly, with a chuckle. Living among academic

colleagues, Greenwald says, he avoids ostentatious displays of wealth and heeds Micawbers Principle. At his

parents direction he carefully adjusted his standard of living when he first became a professor in 1973 and now earns

so much from his various consulting gigs that he has no need for the money and gives most of it away.



DICK BOLLESAUTHOR, WHAT COLOR IS YOUR PARACHUTE?

When Dick Bolles first published What Color Is Your Parachute? in 1970, he had no

idea the outsize impact his career guide would have. I never dreamed the job hunting

problem was so widely faced. The book would have sold ten copies if you got the help

you needed at school. Instead, the job-seekers bible has gone through 42 annual

editions, sold 10 million copies in 20 different languages and, in 1994, was named oneof the 25 books that have shaped readers lives by the Library of Congress.

Bolles himself remains firmly on the job at 86, spending roughly four hours a day

doing research and answering each and every one of the 6,000 e-mails and letters he

receives each year. He regularly dispenses four pieces of advice.

Foremost: Dont make money the most important thing about finding a job. Instead weigh salary

against a positions responsibilities, location, working conditions and growth opportunities. You might be

willing to take a pay cut to get one of those other factors. Those who arent at least considering this are going

through life fishing for the biggest salary while being miserable.

Second, Bolles advises delaying talk of salary, vacation time or health benefits until its clear they want you. Once thepotential employer gets to know you better, they might in fact decide that youre worth more than the average person.

Bolles also stresses the importance of keeping a diary. A weekly record of accomplishments at your

current job will make it easier to discuss your role, in detail, when hunting for a new one. And as a finishing move,

he advocates being bold. Somebody told me the best way to end an interview is to ask: With all weve

discussed, can you offer me this job? When I first heard that, I thought thats kind of cheeky, putting the

person right on the spot. Turned out it was exactly true.

ROBERT SHILLER

ECONOMIST, YALE UNIVERSITYRobert Shiller, perhaps best known for co-inventing the Case-Shiller Home Price Index,

says the American dream of building wealth through homeownership is a fallacy.

Ive documented that home prices in real terms didnt increase from 1890 to 1990,

he says. That was the bubble thinking, but its still fresh in our minds.

How do you get rich, then?

Go into finance or a related field. Its a lifetime decision, advises Shiller. Finance

is the technology for making things happen. Accountant, auditor, marketmaker

these are big occupations. Shiller lectures his students that mathematics, astronomy,

sociology are all very appealing, but there are no jobs in them.Shiller says his thesis supervisor, MIT economist Franco Modigliani, who won the Nobel Prize in

Economics in 1985, taught him not to trust market efficiency because it was only a half-truth. He says

Modiglianis papers on how inflation distorts markets prompted him to invest all his money in the stock market

in the early 1980s as Paul Volckers rate hikes kiboshed inflation and sent the stock market soaring.

Shiller tells his Yale students: If you are wealthy that means you are powerful, and you have to care about

others. He then requires them to read Andrew Carnegies 1889 essay, The Gospel of Wealth, which instructs the

rich to recirculate their wealth through philanthropy.


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LEON COOPERMANFOUNDER, OMEGA ADVISORS

My dad would tell me there are more horses asses than there are horses, says

billionaire hedge fund manager Cooperman, 70. Its the kind of advice that frames the

skeptical go against the crowd mind of value investors like Cooperman. He likes

out-of-favor stocks and ones that are underpriced relative to market multiples, book

value and private market values. It works: His $8 billion Omega Advisors has beenlogging an average annual return of 13% since its inception in 1991.

Advice for getting rich?

It takes hard work, a passion for what you do and luck. And, indeed, it was an

act of defiance and then luck that caused the Bronx-born Cooperman to discover his passion and skill as an

investor. As a young man Coopermans parents pressured him into leaving New Yorks Hunter College to enroll

in dental school. After paying tuition and purchasing all of the necessary tools, he decided he hated it and quit

after only eight days, returning to Hunter to finish his degree. It was an embarrassing and very traumatic time

in my life, he recalls.

In order to fulfill graduation requirements, he took economics classes as electives. He got As, and this ledto Columbia Business School, which led to Goldman Sachs in 1967. I found what I was interested in and never

looked back, he says.

With a net worth of $2.5 billion, Cooperman recently joined Bill Gates and Warren Buffett in pledging to

give more than half of his fortune to charity. Money enables you to put bread on the table at first, but it also

enables you to give back in a big way.

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Wisdom Auwisdom augustust 2013