How I used Millionaire’s Math to get Warren Buffett’s advice

This past weekend I realized there was a stock that was having a Cyber Monday sale. So, I decided to buy. But… before I did, I thought I’d see what Warren Buffett would do…

(Before we dive in: After I made my last post about stocks/investing, I’ve gotten a number of messages from people asking what they should do. I’ve been sitting on this for a few days debating if I should post it here since there’s no one size fits all answer for obvious reasons, and I don’t want people to go buy something just because I bought it(or because Warren Buffett bought it) “Apple stock has a Cyber Monday Sale!” was my original post title but I didn’t release it Sunday/Monday – note: it has gone up several % since I released this on fb which slightly affects the numbers/whether it’s a buy, but not much)

…I asked myself, what would Warren Buffett say to buy if he were your financial advisor right now?

So… I ran some simple numbers and here’s what they said:

He would tell you to buy Apple.

That’s obviously oversimplifying because again, everyone’s situation is different, but with the way Buffett invests that actually matters quite a bit less than if another investor was giving you advice on what to buy. He buys based on what he believes the intrinsic value of the company is, and whether or not the current market price is offering him a deal on that or not.

And ‘the answer’ to what he believes is the best investment in the world at the moment based on his investing criteria, is Apple(note: obviously there are companies w/more upside, or companies with great value that are too small for him to look at – but this is based on everything he sees/fits w/his investing model- margin of safety, etc…)

While everyone was shopping online for Cyber Monday deals, Apple stock was having a giant Cyber Monday sale(and still is) according to the intrinsic value Buffett would place on the company.

So, how do we know that’s the answer he would give? Or am I guessing?

Well, the obvious answer which would have some obvious rebuttals would be that Apple is the company he’s most heavily invested in. But that’d be a really poor answer since this doesn’t factor in when he bought, what price he paid, etc… A stock may have been a deal at a certain price, but may not be anymore.

So, how do we know that right now this is what Warren Buffett would tell us to do?

Well, as of Cyber Monday it opened at 174.24(today it opened at 176.69), so the Cyber Monday sale is still ongoing.

Now, how is this relevant to Buffett? Well, he bought shares in Q1 and Q3. The lowest price the stock reached in Q3 was 190.29(spent most of the quarter in the 200s though). So, he was buying at prices above what it’s currently priced at. Now, he didn’t buy many shares relative to the amount of money he’s investing, so if we looked at Q1 the stock price spent most of its time in the 170s. Let’s just pretend Buffett bought at the absolute bottom, which was 155.15 (which by the way Buffett doesn’t attempt to time the market so there’s a very miniscule chance he bought at the price, but for simplicity/margin of safety we’ll pretend that was the price he paid).

So, you might say- ya but what if in the rare chance he did buy at 155.15, with the price today being in the 170s how do we know this is still what he’d recommend?

Well, Buffett wants to earn around 15% on his money. That doesn’t mean he always gets it, and that number may have changed since the last time he mentioned it, but he’s someone that’s gotten around 20% gains over the last half century. He has an absolutely absurd track record.

So let’s use 15%.

Well, if pretend he bought at the absolute lowest point of the year, that was February 8th. Today is November 28th. We’ll call it 9.5 months ago.

So we could say even if we added 11.875% to the lowest price of the year(again he likely paid higher than that), the price could go up by 18.42 and still be a price Buffett would buy at assuming the fundamentals of the company hadn’t changed. That price would be 173.57. Keep in mind, this is pretending he bought at the absolute bottom, so it’s more likely the similar price would be 180+. And to further prove that again- he bought more shares in Q3 when the lowest price was 190.29.

And keep in mind Buffett is not a stock flipper- he’s a buy and hold investor who prefers to hold for 10+ years(he’ll often hold for many decades). And making the kind of bets he’s making on Apple, it’s unlikely(but not impossible) that something would have drastically changed in the fundamentals of the company to make him want to change his position so soon. There’s a high probability if he doesn’t believe the fundamentals have changed that you’ll see a report sometime in the next few months that he purchased more shares in Q4 – but obviously if someone waited until a public report that Buffett bought, the stock may jump on that news and the price to buy at won’t be the same anymore.

So, cool… Warren Buffett has whispered in your ear the company he thinks you should invest in. So, how much would he say to buy?

This again, is highly dependant on the person, so there’s not as definitive of an answer as the stock he would tell you to buy. However, I’ll give you some things to think about that may help you decide:

If you have an edge, you need wayyyyyyyy less stocks to be diversified than people think. If you have no edge it’s irrelevant and he’d tell you to just buy an index fund. It also depends on the size of your edge – that will change the number of companies for you to be properly diversified. Charlie Munger(Buffett’s partner) says 3 companies is the number that you need to have the diversification you need, but I’m not sure what % edge he’s calculating in to come to that number. So, assuming you have an edge, you could say 5-10 to be on the safe side. But again, if you have no edge it’s irrelevant.

For simplicity sake let’s pretend you do have an edge, either on your own or by understanding the type of bets people like Buffett are making. Well, without writing 10,000+ words on the subject since this is already long, you want to bet heavier on your best bets. You could use something like the Kelly Criterion to calculate your sizing, but you might have difficulty properly sizing your bets if you’re not sure the estimated edge. If you’re not sure, you could use a fractional Kelly bet size to lower risk(which wouldn’t cut the expected gains as much as you’d think). While Buffett has never said he uses this formula for his own investing, he basically uses something close to it because of the way he sizes his investments. He bets very big when he thinks he has the biggest edge, and smaller when his edge isn’t so big, the same way a card counter would properly bet in blackjack.

The fact that Buffett is making his biggest bet on Apple by a very, very large margin is saying that he believes his edge is biggest on this investment(at the prices he was paying). And again we’ve covered the pricing he was betting heavily on it. You could also say that if his desired rate of return is 15%(not sure that it still is), that he believes his expected rate of return to be larger than that since he’s putting such a large % of his capital on it. His desired rate of return would be semi irrelevant to your decision though, because whatever it is all he’s saying with his bets is that he believes it to be significantly more +EV than the avg market return.

So in short, he would tell you to bet heavier on Apple than your other bets, but still to make other bets. If you didn’t know if you had an edge on any other stocks, again, he would tell you to buy an index fund.

He’d also tell you to buy and absolutely forget about the price after that – it will go up and down a lot and will only stress most people out because they think too emotionally. “Omg it’s down today!”… “omg it’s up I’m rich!”… He would tell you to forget all the noise and plan on holding for an extended period of time. Attempting to time the top or bottom of the market is a fool’s game.

When Warren Buffett was leaving this imaginary meeting he tells you this is the only day he’ll be your financial advisor. “Omg what do I do next time I need investing advice Warren, should I ask a financial planner?”.

He would spit out his Coke laughing and say, “F*$k no” (he wouldn’t swear but he’d want to!). He would say, “if you’re not sure what to do, buy an index fund.”

Financial planners are NOT for picking the best investments. That’s one service that they offer, and it’s not one that 99%+ of them have an edge in(they have other services that I believe are valuable, but I’ve never personally used one). And it’s unlikely you stumbled across one of the 1%. If you DID happen to accidentally stumble across the 1%, you’d need to ask yourself if the edge that they have beats the fees you pay. The reality is if you knew the game so well that you were able to identify someone with an edge, you wouldn’t be hiring them to pick your investments for you. 99%+ of people are paying fees to have someone get them average returns, but because of the fees the return they get is obviously below average. Compounding over time this adds up to an enormous amount of money you’re paying to lose to the returns an index fund would get you. This is why Buffett and so many others recommend index funds if you want diversification and have no interest in doing the work to have an edge on the market.

In short:

  • Apple is a very +EV bet
  • Almost everyone should just buy an index fund(even though there’s no edge in doing so, you can still compound really well over time. But if you want to get an edge, it is there to be had).
  • Almost no one should hire a financial advisor for the goal of investment returns
  • The very small % of people that have a chance of beating the market should not diversify past the hedge of doing something like fractional kelly betting, partly because your edge/additional EV is a sort of hedge in its own way over the long term, and the more you diversify the more you cut your edge.

Someone with an edge, and who’s betting using Kelly formula will not only grow their capital at a much faster pace, but risk of ruin will be 0, even though it will seem to the average person to be extremely risky.

(Disclaimers: I’m NOT telling you to go buy Apple. +EV does not mean guaranteed, it just means it’s expected return is better than others. While I’m long on Apple and have been for a lonnnng time(well before Buffett started buying), there’s risk like there is with any investment. Apple could go down a lot, and I’m okay with that for myself personally. If you plan on making any sort of investment on anything you should be comfortable with the potential downside. We’d all be billionaires if there was only risk free investments that compounded quickly! So, don’t do anything just because I do it, or because it’s what Warren Buffett would do. Do you!)

(Note: if you like these types of posts let me know, as sometimes I just send this kind of stuff to family or post on my personal facebook)

24 Responses to “How I used Millionaire’s Math to get Warren Buffett’s advice”

  1. Lesley Amos

    Awesome post Billy. Glad to see you writing again.

  2. Jack

    Great post Billy! Glad you’re writing again!

  3. Paul

    He’s back! Great post Billy!

    In the past, I’ve made and lost a lot of money trading stocks. I only started making consistent money in the market when I began investing in value stocks. Your point about market noise affects the way I traded because of fear and greed. For me, I needed to back off from the market so that I didn’t jump in and out of trades, based on emotion. Life is less stressful when you invest on the basis of millionaire’s maths.

    Keep the articles coming. Take care. Paul.

  4. Milan

    Thanks for the insight Billy.
    Would love to see all types of posts from you (NO MATTER THE SUBJECT)
    All your post have +EV

  5. Sam

    Interesting post, I’m going to check out Apple now interested in the liquidation value vs price as I understand Buffet is keen on this.

    As you mentioned the liquidity is also a huge factor as he’s too big to invest in smaller businesses now.

    Financial advisers take a lot of beef, but people forget what people really pay them for… it’s not to get higher investment returns it’s actually to make a decision for them.

    Most people have little to no clue about investing so for them giving money to an ‘expert’ to make a decision on asset allocation etc which requires a lot of cognitive load makes sense.


    • Billy

      Let me know what you find out on Apple Sam!

      I think you make a good point re: a lot of people just wanting someone to make a decision for them – so they do have value to those people you’re right.

  6. MaxW

    Interesting and good to know. Glad, you’re writing again, Billy!

    Thank you!

  7. Teemu

    Thanks a lot for yet another great post! I like it the most how you explain things so that everyone understands them.

  8. Jim

    Great post Billy. Love the insight and would certainly like to see more of these posts. All the best!

  9. Michael Mangani

    Well Written and thought provoking.. I always like the way you dive deep on topics. Hope all is well.

  10. Stacy Caprio

    I love the investing tips and insight, keep posting!

  11. Ethan Franklin

    Hey Billy. Firstly, I want to thank you for putting out such amazing content. I am halfway through reading all of your posts, and I love the logical base in probability math that underlies all you do. Your post on +EV decision making has litterally changed my life, as I have based a major life decision on the EV analysis I learned in that article.
    Secondly, I wanted respond to your final question. I love articles like this, as they directly relate to the kind of thinking you teach, as applied to a specific decision (in this case, investing). An article on the Kelly Betting System would be delightful, as everything I have read about it so far was textbook dry and unaccessable to non-math majors.
    Lastly, I am wondering if you are doing any coaching in 2019. I am a senior in college and have started 3 small businesses. The first two failed, athough each failed better than the last, and I am currently evaluating whether this third business can be a cash cow business as you described, or if pursuing another opportunity would have a higher EV. I would much prefer to pay for your guidance than go get a generic MBA (which I have decided not to do), as your coaching program is far better suited to an entrepreneur’s goals. If you are doing coaching any time soon, please let me know. Thanks again for all the content you put out; it’s so refreshing to be able to evaluate concepts based on mathematical principles.


    • Billy

      Thanks for the great comment Ethan, and email(I responded to it but it got returned- said it couldn’t deliver to that email).

      I’m not doing the Incubator that I’ve done in the past for people. I don’t coach much in general due to other focus, but very occasionally I’ll take someone on or do a coaching call.

  12. Bryan

    hi billy love the post! I just watched this video ( it talking a lot about apple’s huge bank account and its ability to potentially buy a big company or a large amount of its stocks back. If you worked at the management team at apple what would you do? buy back shares or diversify to another field? this video also said it need corporate tax to be lowered in the US to allow this flow of money to happen.

    cheers Bryan

    • Billy

      Hard for me to say Bryan, I’d need to know a lot more variables. They’ve got a lot of good options though!


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