What should I invest in, so that I am well prepared for retirement? It is a question that I get asked most often from my friends. My response to them is simple:
- Invest in yourself.
- Spend less than you earn.
- If you can stomach a drawdown of 50+ percent, then invest your savings in a diversified index fund.
Technology is making inroads into every industry. The shelf life of skills is getting shorter and shorter. The wise thing to do is to get good at your job so that your employable moat isn’t breached by automation. That’s why the best investment is to invest in yourself.
Markets across the globe, including India, are getting more and more efficient. Most (99.9%) active investors over the long run, two or more decades, will fail to beat the index. A rational person will not go against the base rates— unless you’re sure why you belong to the elite group (0.1%). That’s why investing in a diversified index fund works best for most (99.9%) people.
Rohit Chauhan wrote an excellent piece on this topic: A future advise to my kids. I can’t agree more on what he wrote. I highly recommend reading it. Someone asked the same question, that my friends ask, in 2002 Berkshire Hathaway shareholder meeting. What did Buffett answer? Invest in yourself.
Warren Buffett: Now, let me give you one suggestion for that group. I use this sometimes when I talk to high school — a bunch of high school seniors down in Nebraska Wesleyan, a few weeks ago. Tell the youngsters in the class, they’re probably around 16 or 17, and if they’re like I was when I was 16, you know, I was only thinking of two things.
And Martin’s Aunt Barbara wasn’t going out with me, so I was down to cars.
I tried hearses, but that didn’t work.
And let’s assume, and I use this with — let’s assume a genie appeared to you when you turned 16, and the genie said, “You get any car you want tomorrow morning, tied up in a big pink ribbon, anything you name. And it can be a Rolls Royce, it can be a Jaguar, it can be a Lexus, you name it, and that car will be there and you don’t owe me a penny.”
And having heard the genie stories before, you say to the genie, “What’s the catch?” And of course, the genie says, “Well, there’s just one. That car, which you’re going to get tomorrow morning, the car of your dreams, is the only car you’re ever going to get. So you can pick one, but that’s it.”
And you still name whatever the car of your dreams is, and the next morning you receive that car.
Now, what do you do, knowing that’s the only car you’re going to have for the rest of your life? Well, you read the owner’s manual about 10 times before you put the key in the ignition, and you keep it garaged. You know, you change the oil twice as often as they tell you to do. You keep the tires inflated properly. If you get a little nick, you fix it that day so it doesn’t rust on you.
In other words, you make sure that this car of your dreams at age 16 is going to still be the car of your dreams at age 50 or 60, because you treat it as the only one you’ll ever get in your lifetime. And then I would suggest to your students in Phoenix that they are going to get exactly one mind and one body, and that’s the mind and body they’re going to have at age 40 and 50 and 60.
And it isn’t so much a question of preparing for retirement, precisely, at those ages, it’s a question of preparing for life at those ages. And that they should treat the importance of taking care and maximizing that mind, and taking care of that body in a way, that when they get to be 50 or 60 or 70, they’ve got a real asset instead of something that’s rusted and been ignored over the years.
And it will be too late to think about that when they’re 60 or 70. You can’t repair the car back into the shape it was. You can maintain it. And in the case of a mind, you can enhance it in a very big way over time. But the most important asset your students have is themselves.
You know, I will take a person graduating from college, and assuming they’re in normal shape and everything, I will be glad to pay them, you know, probably $50,000 for 10 percent of all their earnings for the rest of their lives. Well, I’m willing to pay them 10 percent for — $50,000 for 10 percent — that means they’re worth $500,000 if they haven’t got a dime in their pocket, as long as they’ve got a good mind and a good body.
Now that asset is far, far more important than any other asset they’ve got, unless they’ve been very lucky in terms of inheritance or something, but overwhelmingly their main asset is themselves. And they ought to treat their main asset as they would any other asset that was divorced from themselves. And if they do that, and they start thinking about it now, and they develop the habits that maintain and enhance the asset, you know, they will have a very good car, mind, and body when they get to be 60. And if they don’t, they’ll have a wreck.
6 thoughts on “Invest in yourself”
I am following your blog and eagerly waiting for the new posts (big fan) all the time. Thank You.
Here you mentioned about the “investment in Index” thinking abt your (3 bucket formula also)
I am in India and you suggested to stay invested in good Mutual Fund than Index with valid reason. I agree.
Do you still stick with a statement of Index is not a good option to invest in India ?
And this topic “invest in yourself” mostly talked about the Investment perspective than learning to improve our skill etc..
Glad to know that you find my writings useful.
Even in India, I would suggest allocating 25% in the index funds and put the balance in good mutual funds. Keep an eye on SPIVA report on India and slowly increase the allocation to indexes as the evidence becomes favorable for indexes.
The main idea behind invest in yourself is to not over-index on picking individual stocks. Instead, focus on developing your skills so that one can continue adding value and get their fair share from the society.
Excellent article. How to pick the right mutual funds in India?
Here are a few simple heuristics:
(1) Time tested with a decent track record.
(2) Low expense ratio.
(3) Not sector specific, unless you choose it for a reason.
(4) Fund managers and employees invest in their own fund – skin in the game.
If everyone starts doing indexing – indexing by its own nature the average of everyone will not work as well.
Doing average is great but one should not blindly believe what worked in the past will continue to work in the future. I’ll not take base rate as an excuse to not try If everyone starts thinking rational (following base rate ) no one will take the risk to build out companies like SpaceX, Tesla, etc and then you will not have an efficient market to do achieve average returns.
I think the advice of indexing has been pushed too loosely in this decade, I always tell people to take the risk rather than focusing on average. Risks taking has done wonders for this world & should be promoted.
How indices have done over a long period of time –
Thanks for your thoughtful comments. For a healthy market, it’s essential to have active investors, so that inefficiencies get exploited. Few- very few – active investors will outsmart the market over the long-term. No one size fits all. What one chooses to do is a personal choice. Understanding the base rates and knowing thyself is crucial.
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