Wednesday, August 19, 2009

Warren Buffett On Inflation

Warren Buffett has written a very interesting and timely article in the New York Times today. For those unfamiliar with Warren Buffett, he is one of the world's greatest investors, having made his fortune in the stock market. He now runs the corporate conglomerate Berkshire Hathaway.

In the article, Buffett compares the current budget deficit to those of years gone by. As a percentage of GDP it's twice the previous non-wartime record. It gone up to 13% where the previous high was 6%.

He also points out that US net debt has risen from 41% to 56% of GDP and questions at what point the country's credit rating will be put at risk. Sooner or later other countries will perceive the United States as credit risk if debt levels keep rising.

Lastly Buffett discusses the risk of rising inflation as a result of all this. All of this debt must be financed and with the prospect of the Government printing more money, inflation may soon follow.

From an investor's point of view, it begs the question how do we protect our investments from inflation? I will write more about this in the future.

Click the following link to read Warren Buffett's op-ed piece entitled The Greenback Effect.


Thursday, August 13, 2009

Replicating The Asset Allocation Of The Ivy League

I'm a big fan of the returns the big Ivy League endowment funds have been able to produce over the years. Yale has been able to produce a compound return of almost 16% over a 20 year period. Harvard produced a compound return of just over 14% over the same time frame. So it is with interest that I study the asset allocation of these funds each year.

However, as a small investor, I've always felt that I was unable to replicate the asset allocation of these endowment funds. They have been reducing these exposure to listed equity investments in recent years thereby making more difficult for an investor like myself to approximate what their investment portfolio contains.

But just recently, I read an article on the Kiplinger website (The Ivy Endowment-Fund Portfolio) where a simple portfolio is put forward which aims to copy the diversification and risk management techniques employed by the ivy league schools. The best part is that because the portfolio is composed of 10 exchange traded funds, the average investor like myself is able to buy these ETF's directly on the stock market.

The diversification achieved and low cost of using ETF's in an investment portfolio have been discussed at length many times the world over so I wont go into the arguments again here. Suffice to say that I'll be taking a closer look at the asset allocation recommended in the article to see whether it's worth incorporating some of the investment ideas into my own portfolio.