A new book profiles ten unknown, ordinary investors—including college dropouts, engineers, a former truck driver, a retired DJ, most of them without MBAs or fancy degrees. What makes these investors extraordinary, however, is that they’ve managed to do what the wisdom on the street says can’t be done by consistently pulling in amazing returns. How amazing? How about an average of 34% annually since 2001, and yes, that’s with the stock market crash factored in.
So, can just any Joe on the street beat the market? No. No, no, no, no, no. NO. The folks profiled in The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard of, and What You Can Learn from Them, written by Matt Schifrin, vice president and investing editor at Forbes Media, are extremely smart, hardworking individuals who are comfortable taking on risks that’d send the average consumer running for a savings account with a 1% return with his tail between his legs.
Two things that all of these ordinary-extraordinary investors have in common is that they’re really good with math—we’re not talking algebra here—and that they’re always looking for a bargain, obviously in the stock market, but also more often than not when it comes to their everyday expenses as well. Yes, dear frugal readers, you’ll be happy to hear that these investors tend to be total cheapskates.
One of the tightest investors profiled, an engineer from California named Mike Koza who has achieved an average annual return of 34% since February 2001, and who uses a secondhand phone he bought for $1 at a rummage sale, is interviewed here by Schifrin:
What are they doing in Las Vegas? I’m guessing they were there to enjoy the cheap buffets. And that Koza used miles to pay for the trip. Anyway, Schifrin answers my questions below:
First off, who do you see as this book’s main audience? At first glance, it seems to present the idea that just about anyone can make a fortune investing — because the folks featured in the book (former truck drivers, non-MBA types) have done so. But when you read about how much time, effort, and strategy these investors put into what they do, and you realize how much risk they take on, it’s clear these people aren’t at all average investors. So … who can benefit most by reading this book?
Matthew Schifrin: Good questions. My book is about ordinary people with outstanding investment records. While I do believe that most investors have the ability to improve their returns –if they devote more time to do so. You are correct in pointing out that these individuals have worked very hard to become great. It didn’t happen overnight and their journeys were not without pitfalls and setbacks.
My book is aimed at people who are self directed investors, or people who have a desire to become self directed investors one day. I think post-2008 many of us have been left with broken nest eggs and are concerned that our current financial advice, or passive index fund devotion, may not be enough to enable us to achieve our financial goals. For many of us the “8% on average” per year in stock returns is simply inadequate. I think people owe it to themselves to learn to be better investors, even if it is just so you can better monitor your financial advisor. We all obsess about the houses or cars we buy, but when it comes to our portfolios we merely hand the keys to someone else and hope for the best.
My book shows 10 real life examples of everyday people with outstanding investment returns. It offers investing lessons, case studies, and resources.
Do you worry that novices with very little experience investing will try to emulate the folks in the book? And that they’ll lose their shirts?
MS: Not really, because I think I am very clear, as you point out, that this takes a significant commitment of time and I also point out the risks involved. Also in Chapter 11, called Legendary Investor Incubators, the first site I mention is Marketocracy.com. That is a site designed so that people can test out their skills and learn to be a better investor without losing their shirts.
For novices interested but worried about losing their shirts, what are some baby steps they can take to get into the game without too-too much risk?
MS: I highly recommend AAII.com, the web site of non profit American Association of Individual Investors. This is a great site for investor education for novices to advanced investors. Lots of resources and tools on AAII.com. I also recommend creating a virtual portfolio on sites like Marketocracy.com which offers you the chance to manage a $1 million virtual portfolio. On that site you will be subject to all of the rules and constraints of a real life mutual fund manager.
The investors featured in the book have very different investing philosophies, often focusing on entirely different aspects of the market. What, if anything, do they all have in common in terms of characteristics, practices, and habits?
MS: There are a few things that I noticed several had in common. As you pointed out this takes time and hard work. First, every single Warren Buffett Next Door was passionate about investing. They enjoy it! You have to like what you are doing if you want to do it well. That plays into the second factor, all spend at least 3 hours a day researching or tending to their portfolios. I also found that most were very good with numbers and several were engineers. Included are Mike Koza, civil engineer from Sacramento, Justin Uyehara also an engineer in California, Bob Krebs, my Options Apostle, also an engineer. There is one person, Kai Petainen who has a degree in Computer Science. So, an affinity for math is apparently a big plus.
Lastly I noticed that most were frugal in their orientation to living. This is not unlike Warren Buffett himself who is noted for his thriftiness. Alan Hill, who I call the Network Miner (because he has been skillful at navigating his network of friends on online message boards for stock ideas), takes pride in never having purchased a new car. Mike Koza and wife admit that they live way below their means (they are multimillionaires). Like any good value investor, they love a bargain when they see it. These people like to get $1 for 50¢.
What, in general, do these investors think about “investing gurus” featured on cable TV and writers who make it their business to make stock picks?
MS: That is an interesting question. Most of them don’t become distracted by these TV investing gurus. To them a lot of it is noise. That said, several of them subscribe to certain select investment newsletters, whose editors they respect. I detail them in my book. Like any good investor these Warren Buffetts Next Door listen to lots of different sources of information but are very selective in determining which advice makes its way into their investment portfolio.
Which investor featured in your book takes on the least amount of risk? And how does he do it?
MS: They are all risk takers but in some ways it might be Chris Rees, who is in Chapter 1, Vagabond Value. For 30 years Chris was a hippie vagabond moving from town to town across the globe, earning enough to live week by week. He kind of had a subsistence approach to living. I believe his focus on bare minimums has had a great effect on his investing strategy. Chris’ guiding mantra is “Don’t Lose Money.” He is obsessed about protecting his downside and is very selective in picking stocks. In general his portfolio only holds 10 stocks. He buys companies that he believes are selling at deep discounts to their “tangible” asset value, and must have little or no debt. He looks at company’s liquidation values so he can figure out worst case scenarios for his investments. Chris’s portfolio turnover is relatively low. His approach borrows a lot from the style of deep value investors like Warren Buffett.
As a writer whose beat focuses a lot on saving money, I find it wonderfully amusing that nearly all of the very successful, very well-off investors featured in your book are super frugal in their person lives — like other people who know lots about money and Warren Buffett himself, of course. What are some of your favorite examples of their thrifty behavior? And why do you think it is that frugal living and highly successful investors so often go hand in hand?
MS: My favorite example of this is Mike Koza from Sacramento. When I interviewed him on the phone it was very static-y and I said “Mike, what is the matter with your phone?” He said “Oh, I got this at a rummage sale for $1.” It blew me away that this multimillionaire would continue to pinch pennies wherever possible.
It is clear to me why frugal living and investing success go hand in hand. Successful investing involves buying undervalued assets (stocks), finding bargains. It is more than just an investment strategy for these people, it is a way of life.