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More Passive Investing without Index Funds


  • I have moved all of my investments to a more passive approach so I can divert more time to building businesses instead of stock picking/reading about markets.
  • My liquid holdings are now ~33% equity, ~33% REIT (real estate investment trust), ~33% reserves (cash, commodities, crypto).
  • All of my equity is in Berkshire Hathaway.
  • All of my real estate is in Store Capital.
  • Even though I am taking a passive approach I am trying to avoid index funds because I am concerned with conflicts of interest, a herd mentality and financialization.

Why am I going more passive?

I was stock picking because it provided motivation for me to learn about certain businesses (e.g. learning about REITs through Store Capital, learning about airlines through Ryanair and Southwest). I also thought that, over time, I would become good enough to get an edge over the market.

I still think that investing in individual stocks and reading quarterly reports is a decent way to learn about businesses. However, I was looking at the Seeking Alpha app on my phone too much and found that distracting. At the start of September I uninstalled the app. Since then, I’ve decided that building my own businesses is a more worthwhile use of my time. I would also like to read less news and read more books. News changes a lot day to day, whereas good books tend to have learnings that are more lasting.

Lastly, having seen stocks move through COVID, I have a greater appreciation for the difficulty of stock picking. I felt a need to take a simpler approach with my investments.

Side note: I heard a quote from Elon Musk talking about how Warren Buffett’s job is to “figure out, does Coke or Pepsi deserve more capital?“. That made me think a lot.

Why 30-30-30-5-5 in Equity, REIT, Cash, Bitcoin, Gold?

I like a little Bitcoin and gold as a hedge against inflation. I may lose all of the money in Bitcoin, but I think it’s worth the upside. For what it’s worth, I’ve had roughly 5% gold and Bitcoin for a number of years, so this isn’t a recent change.

I’ve talked before about the Benjamin Graham 50-50 split between stocks and bonds. The 30-30-30 split in Equity, Real Estate and Cash/Bonds is from Gerd Gigerenzer in the book Risk Savvy (technically, his recommendation is 33-33-33). Given how much money is being printed by the fed, the size of the US debt, and the weakening of the US dollar, I think that having some real estate is likely wise. Real estate is also a huge asset class and is similar in size to the US equities market, so it seems to me that having exposure there is probably smart.

Side note: A nice comment from Nassim Taleb given recent federal reserve money printing was something to the effect of “you can’t afford to be in stocks, but you can’t afford not to be in stocks”.

Why not use broad market index funds?

I think it is likely a reasonable approach to use a broad market index fund for stocks and maybe also for REITs. However, I am seeing herd mentality in the market with index funds and, while I can’t describe what might go wrong, I have a gut feeling that is not good.

Everyone is ploughing into index funds offered by companies like Vanguard, Schwab, Statestreet and Blackrock. The benefits of these funds are i) diversification and ii) low management fees and commissions. However, I have these concerns:

  1. Conflicts of interest. While index funds now have near-zero management fees and commissions on trades, the index fund managers are receiving payments from exchanges (the companies that execute the buying and selling of stocks for them). Vanguard, Robin Hood, Public and many other companies are getting paid by the people that are doing the buying and selling stocks for them. It’s called receiving “payments for order flow”. Where is that money is coming from? The only place I see it coming from is me – the consumer – getting a bad price on trades.
  2. Herd mentality. People are piling into index funds. Back in 2019, passive index funds got as large as managed funds, when measured by total assets under management. I have yet to find a market where you do well over the long run by piling in late to the same strategy as everyone else. Maybe if you get in early you have a chance, but index funds are no longer early.
  3. Financialization. With everyone jumping into index funds, it means more people are spreading their money in the widest way possible into companies they have largely not heard of. With index funds, my concern is that we are outsourcing and diluting our ability to influence our investments and instead calling for governments and rating agencies to be responsible for how companies are managed. Here is my view: 1) I see a role for government is setting ground rules, 2) I don’t see a role for rating agencies (how can you have a rating agency that is paid by a customer to give that customer a rating? surely a conflict of interest but somehow pervasive in our financial system), 3) People/investors also have to take responsibility at the grass roots level and put in the effort to follow, support and influence the companies they invest in. We need less diversification into index funds and more focused investments with investors taking an interest in their businesses (which is where the term “taking an interest” comes from, I imagine).

Side note: There are companies emerging that offer services to track corporate social responsibility metrics (environment, diversity etc.). If they are being paid by the same clients that they are providing reports on, I see them as having the same problems as credit rating agencies.

If not an index fund, then what?

If I’m not going to use an index fund for equity and REITs, then what am I going to use? The answer is something that lets me sleep at night and has a) has a track record, b) has managers with skin in the game (they have a majority of their net worth in the asset), c) something diversified.

For equity, I have Berkshire Hathaway (Buffett’s company), with a long track record, managers who have nearly all of their net worth in stock of the company, and with reasonable diversification across insurance, industrial businesses and a large share in Apple. I have owned Berkshire for a number of years and have now increased my stake.

For REITs, I have Store Capital. Store Capital is a holding of Berkshire Hathaway (they own about 10% as of the time of writing) and is run by an industry veteran, Chris Volk, who is a big shareholder. I was impressed with their monthly updates during COVID-19 – you can listen to their updates or read about them here. Store Capital is also pretty well diversified because they have property in nearly all states and their largest client is no more than about 2% of their portfolio, so they aren’t vulnerable to a single large client (which is a good think because AMC cinema is a client of theirs!). As a caveat though, Store (as is the case with Berkshire) is not as diversified as the broad market. Store is focused on triple net leases to moderate-to-large businesses, so you are not getting diversification across things like residential real estate or cell towers. Side note: I have owned Store Capital for six months now and added to my stake with cash and with proceeds from other stocks that I exited entirely (Facebook, Ryanair, Southwest, JetBlue, JPMorgan + a small holding in StoneCo).

For cash/bonds, I have US dollars. Maybe at some point I’ll consider holding some other currencies. If interest rates were higher, I would have the money in short term treasury bills. There are probably other better options too, but I don’t know a lot about bond portfolios.

Last Remarks

I plan to re-balance my portfolio at the start of every quarter, to avoid the temptation of trying to time the market.

I’ll be looking to find a long term option for the 30% cash/bonds portion. Maybe it will have to be an index fund, but maybe I can find something else I’m comfortable in.

My main concern with the portfolio is CEO succession at Berkshire and Store Capital. I’m hoping Chris Volk stays on for quite a while at Store Capital, and that Todd Combs (currently running Geico) or someone else with a strong track record and equity in Berkshire is the one to take on the mantle at Berkshire some day.