The amazing secret to Warren Buffett’s riches

Finally, and perhaps decisively, the S&P/ASX 200 has surged through the 5,600 mark.

Hold onto your hats, Foolish readers.

Before you blink, the next stop could be 6,000.

You can’t say we didn’t warn you, especially with interest rates riding at just 2.5%.

Is it a case of the market finally believing this low interest rate environment is here to stay?

Or that earning season will surprise, on the upside, like it has for US companies?

Regular readers of this free Motley Fool Take Stock email newsletter will already know my views… I’m on record as saying I wouldn’t be surprised to see the RBA cut interest rates even further than the already low 2.5%.

That may be great news for the mortgage belt, but it’s another kick in the teeth for savers and retirees, especially given the average cash weighting in Australia’s self-managed super funds is a whopping 28%.

For those of us, me included, sick of watching term deposit rates go lower and lower, thankfully there are two attractive alternatives…

1) Dividend paying stocks, preferably of the fully franked variety.
2) US-quoted shares.

More on both a little further down.

Back to interest rates…

It seems I’m not the only one tipping lower interest rates, today’s AFR headline saying…

“Aussie dollar tipped to force Reserve Bank interest rate cut.”

It’s no secret the Reserve Bank of Australia (RBA) wants the Aussie dollar lower — down as low as US85 cents.

Try as they might to talk it down, it’s not budging, stubbornly stuck around US94 cents.


In a world of 0% interest rates, by comparison, the Aussie dollar looks a very attractive alternative, especially to outsiders.

Actions speak louder than words, meaning the next step for Glenn Stevens and his merry band of bankers is to talk the talk, and cut interest rates.

So says Phil Moffitt, Goldman Sachs Asset Management’s veteran bond expert.  According to the AFR…

“…the confluence of weak domestic growth, an expected fall in inflation as the carbon tax is ­discarded, and the high currency was pointing towards a potential cut in the official rate below its current 2.5% setting.”

Coming on top of Goldman Sachs economist Tim Toohey recently saying he would not be surprised to see the RBA cut interest rates to 2.25% as soon as September 2014, it’s not looking good for those cash-rich savers, including SMSF accounts.

An investor’s greatest fear is piling all their money into the market right before a market crash.

I’ve got news for you…

Investors, including perma-bears like Marc Faber, have a horrible record of predicting market crashes.

The author of The Gloom, Boom and Doom Report is at it again, earlier this week saying on CNBC he expects stocks to drop 20 to 30% by October.

I’ll gladly take the other side of that bet. Given market crashes come along very rarely, the odds are massively in my favour.

Your biggest risk is NOT that a market crash is just around the corner — it’s that you’ll pick the wrong stocks, for example, piling your cash into some high-risk mining stock punt in the you will strike it rich.

I’ve been investing for 25 years — hope is yet to make it on to my list of factors to check off before I invest some of my precious cash into a company.

Rest assured, hope is not a strategy we rely on.

Sure, I’ve made my share of investing mistakes. It comes with the territory. In the stock-picking game, if you’re right six times out of ten, you’re doing very well.

That said, like you, I hate losing money.

But I’m not about to let that stop me investing in high quality companies, paying good dividends, trading at fair prices, and holding them for the long-term.

You might call it business focused investing. We call it Foolish Investing.

It’s an investment strategy that Warren Buffett has used to build a vast fortune.

Warren Buffett

Buffett is a great investor, of that there’s no doubt. But what makes him rich is that he’s been a great investor for two thirds of a century.

Of Buffett’s $60 odd billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him.

Buffett’s amazing secret is time.

The moral of the story? You’re never too late to invest in the stock market, especially with interest rates at these low levels, and with the very real potential of them falling even further, perish the thought. As I said previously, there are two ways I’m fighting back against these pitifully low term deposit rates…

Fight back plan #1 – Buy dividend paying stocks

Just to be clear, I’m not talking about the usual suspects, including Commonwealth Bank of Australia (ASX: CBA)Telstra Corporation Ltd (ASX: TLS) or Woolworths Limited (ASX: WOW), even though my family owns shares in all three companies.

I’m looking further afield, to companies like Contango MicroCap Limited  (ASX: CTN).

Just two months ago, in this very publication, I said the stock’s “7.3% dividend yield puts term deposits to shame”, later going so far as to put a chunk of my only family’s money to work in the stock.

Yes, Foolish readers. I’m talking the talk, putting my own family’s money on the line.

So far so good — I’m already sitting on a capital gain of 7%, with the dividend still to come. It’s the best of both worlds.

Speaking of dividends…

There’s no shortage of candidates, with several companies yielding around 5% or more, fully franked, which equates to a grossed up dividend yield of around 7%.

Fight back plan #2 — Buy US-quoted stocks

I DO own Facebook shares up, 116% over the last 12 months.

Try finding that sort of gain for an ASX-quoted blue chip, although it should be note Motley Fool Share Advisor recommended stock SEEK Limited (ASX: SEK) gave it a good nudge, up an impressive 77% over the past year, now up close to 150% since Scott Phillips tapped it for Motley Fool Share Advisor subscribers.

Sadly I DON’T own Twitter, its shares soaring as much as 35% higher in after-hours trading after the micro-blogger’s revenue and user growth beat estimates.

Again, try finding a $22 billion ASX company capable of that sort of explosive share price action. In fact, perhaps shockingly so, there are only 12 ASX-quoted companies worth more than Twitter.

Couple the pure growth potential of many US-quoted shares with the inevitable fall of the Aussie dollar, and you’re looking at what seems to be a compelling investment opportunity.

I’ll leave the final word on interest rates and the Aussie dollar to Betashares’ chief economist, David Bassanese.

Quoted in the  AFR , he says the Australian dollar is about 16% overvalued and should be trading at US82 cents.

Going one step further, and this is where it gets REALLY interesting, BetaShares suggests that if the Aussie dollar was to fall to US70 cents in the next six years,  investors would be 36% better off  investing in US financial assets, excluding the benefits of interest, capital gains and dividends.

US-quoted stocks, anyone?

Here Are 2 Top ASX Shares Warren Buffett Would Love...

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The Motley Fool's disclosure policy is accountable. Of the companies mentioned above, Bruce Jackson has an interest in Commonwealth Bank, Telstra, Woolworths, Contango MicroCap and Facebook.

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