Running Your Retirement the Berkshire Hathaway


tWhile reading an article in the February 2012 issue of Fortune, which summarized Warren Buffet’s upcoming letter to shareholders titled, “Warren Buffet: Why stocks beat gold and bonds,” something sounded very familiar in his message.  At first, I couldn’t seem to place where I had heard a similar message … oh, yeah my July 2010 DBusiness WebXtra article titled, “Market Volatility May Not Always Equal Market Risk,” (not inferring I have his level of intelligence). But there was something else I had not realized until I read his article for a second time — sometimes I may be a little slow.  What if the average retiree ran their retirement lifestyle/plan throughout retirement like he runs Berkshire Hathaway?  No, I am not talking about the sheer performance of his stock picking ability or long term track record…that would be ridiculous and frankly unattainable. What I’m referring to is the process or approach he takes for his shareholders purchasing power.

tSimply stated in his annual shareholder letter, “At Berkshire Hathaway, we take a more demanding approach, defining investing as the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power — after taxes have been paid on nominal gains — in the future. More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.” He also goes on to explain the different characteristics of asset classes to invest into (stocks, bonds, or cash) and the ones that have historically continued to achieve the above quote: Namely stocks.

tIn continuation, explaining a concept that I believe the vast majority of retirees or investors in general miss, which is “From our definition there flows an important corollary: The riskiness of an investment is not measured by beta (a Wall Street term encompassing volatility and often used in measuring risk) but rather by the probability — the reasoned probability — of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And as we will see, a non-fluctuating asset can be laden with risk.”

tLet’s break down the first part of his conversation to compare this with a retiree’s retirement income plan. Think of the following: The average couple that retires at age 62 has the joint probability of one of them living close to three decades in retirement (non-smokers). The three decades is your holding period — by the way if planned properly the holding period should be throughout generations. Now given that their purchasing power needs to grow, as the cost of living continues to grow, what asset class do they need to own a portion of to keep up with Mr. Buffet’s quotes? Yes, Equities. This may be the asset class that retirees, who want to maintain a lifestyle of dignity and independence, need to get comfortable with its historical returns (and stop listening to the financial media).

tThe last sentence of his quote refers to “non-fluctuating” assets, which are bonds, CD’s, or money market instruments. You most likely won’t be placing the amount that Berkshire Hathaway does, $20 billion; in these types of assets but your need for this asset class is no different from his liquidity. More directly, you should be placing anywhere between one to two years of living expense in this asset class. Why?  Just in case we run into another market event that comes along about once every five years.  What I am referring to is since the end of World War II, we have seen roughly 13 bear markets (a peak-to- trough of drop of 20% minimum…technically speaking), a temporary drop in the market by around 30 percent on average and they have lasted for around 16 months on average. However, the confusion of many retirees comes from the mistake of correlating this “non-fluctuating” asset class with safety- in the long term. Even Mr. Buffet acknowledges, “Most of these currency-based investments are thought of as "safe." In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”  For example, since 1965 it takes roughly $7 today to buy what $1 did back then.* Again…Purchasing Power.

tSo, what is your next move as a retiree or soon to be retiree? Have a conversation, if you haven’t already, with your financial planner. Hopefully a Board Certified Financial Planner (read my other article, “The Alphabet Soup of the Financial Industry.”) that you have trusted your family’s long-term financial well being. Your CFP® can run your comprehensive financial plan to show you just how long those monies will potentially last throughout the three decades needed to live that life of dignity and independence. Now, you’re running your retirement the Berkshire Hathaway.


tPast performance is no guarantee of future results.  There is no assurance that any investment or strategy will meet its stated objective.

tThis article was written by Lou Melone, Managing Partner, with Budd, Melone & Company in Auburn Hills, MI.  Lou Melone can be reached at 248.499.8704. 

tPosted date on Article XV, Issue II

t*Source: Berkshire Hathaway 2011 Shareholder Letter as posted in Fortune February, 2012

tDated 3.2012
tWells Fargo Advisors Financial Network did not assist in the preparation of this article, and its accuracy and completeness are not guaranteed.  The opinions expressed in this article are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates.  The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

tBudd, Melone & Company and Wells Fargo Advisors Financial Network do not provide tax or legal advice.

tStocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.  An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuation

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tInvestment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC.  Budd, Melone & Company is a separate entity from WFAFN