Have a Warren Buffet approach in 2013

January 3, 2013, 3:55 pm Peter Switzer Yahoo!7

Copying the style of the great investor will serve you well in 2013.

This is the time of the year that I’m contacted by media outlets to talk about how Aussies can make money in 2013. I tell them to do what they should have been doing in 2012!

Don’t be a punter


However, one whacky TV show wanted me to talk about the pros and cons of buying racehorses, as they apparently did well in 2012 but I drew the line on that one. This normal person’s attitude to look for quick results like race horsing or exotic shares generates normal results at best, which typically disappoints the normal person, let alone the aspirational wealth-builder. Looking for the long shots breeds inconsistent results. You need a consistent investment strategy.

Don’t fool yourself


So what was the approach that worked in 2012 and in most years that tells you that it is generally silly to try and be a Warren Buffett in your own mind? If you look for way out high returning investments, you are not acting like Warren Buffet at all. In fact, if you were a Buffett-style investor, you’d have done well last year.

The real problem for investors is when they play the punter who tries to pick winners. Smart guys like Buffett pick a smart strategy and generally stick to it. This is what I suggest for this year.

Switzer’s call on 2013


Before I outline my game plan for you, let’s look at my guess on the investing year ahead. Here is in a nutshell:

1. 2013 will be better than negative types are predicting but I see the year in two halves.
2. First half — slower economic growth and unemployment will rise but not too high — under 6%.
3. The RBA will cut rates one or two more times — not 4 times to a cash rate of 2% as some economists are expecting.
4. Home loan interest rates will go a bit lower.
5. Business interest rates will have to fall but I don’t expect big drops.
6. Term deposits will go lower.
7. I think both business and consumer confidence will gradually improve especially if interest rates fall.
8. The stock market will have strong year — better than 10% and could even be a 20% year!
9. China will keep on defying doomsday merchants — the pace of activity in China's manufacturing sector on December hit its fastest rate since May 2011.
10. The USA with a fiscal cliff deal will mean it will grow stronger than 2012, which will help Wall Street and global stock markets, as well as ours.
11. Europe will have some worrying developments but by the second half there will be some green shoots for growth.
12. Locally economic growth will be better in the second half as interest rates and a better world economic and market story develops, which will help real estate prices.
13. I still like dividend paying stocks but some cyclical stocks will start doing better over the year.
14. The damn currency could put a dampener on our rosy outlook by staying above parity and it could even sneak up to 107 US cents, so I hope the RBA responds by cutting interest rates.
15. As it is an election year, this could hold back some investment by business and even consumers could be hesitant to buy homes but the prospect of no hung parliament could actually encourage spending.

16. Globally China, USA, ASEAN countries and Japan will all grow faster and this will help Europe, eventually, and this will help commodity prices and so I like stocks such as BHP-Billiton and Rio Tinto.

Switzer’s plan for 2013


Okay that’s my educated guess on the year, so what is my plan? It’s not too different from last year and I have to say, only if I expected a market crash would I have a vastly different plan.

You see, someone like Buffett could heavily retreat to cash if he thought stock market prices were crazy. He has often warned to be fearful when everyone is greedy but the opposite is the case now with most people fearful.

However, as interest rates are falling more and more, nervous investors will creep back to the stock market. I hope they creep back to a situation where they have a good exposure to stocks, fixed interest securities and property.

So what is a good exposure? It depends on your age and your risk appetite, so I will profile a couple of extremes.

If you’re young, say under 40 to stretch the young age limit, I’d be 80-100% in stocks. You have plenty of time to retirement and I’d be buying quality stocks with a bias to dividend payers. Go for great brand names who will be here in 20 or 40 years time. Throw in some stocks that will be good for capital gain such as quality miners and some industrial stocks and you’re on the road to making money.

If you’re closer to retirement or newly retired, you might be 50% stocks and 50% cash and fixed interest. You could take 10% off both and be 20% in property, or if you have a great rent-paying property, you could bring the exposure to stocks down accordingly.

It’s tempting for retirees to be in cash and that’s OK when you can get 6% or even 7% in term deposits. Creep out of cash and into stocks that pay you a decent dividend, such as 5-6% and with grossing up because you’re paying no tax, the return creeps up to 8% or better.

But what if there is a crash? Well, you always need a buffer of cash to help you for two years or so but this is only needed if you’re eating into your capital.

Try to create a plan so when you retire you can live off the returns of your investment. So if you have $600,000 and you pocket 8% interest, on average you have around $48,000 a year to live off. If you have a bad year and the dividend flow is say $8,000 short, you could use some of your cash to make up but when good years come around you build up your cash reserves.

I operate off the rough rule that stocks will return around 10% a year over a decade, but three years could be negative years but the better years push up the returns.

Only if I thought a crash was coming and interest rates were rising would I be tempted to sell off stocks and go to cash but that is a big gamble as timing the market is not for the feint-hearted.

Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au

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