Warren Buffett & Jay-Z Talk Business

Billionaire investor Warren Buffett and music mogul Jay-Z both met at a diner in Omaha recently to discuss business, getting started early and how to cope with change in today's markets in a discussion with Steve Forbes. Forbes magazine has some of the transcripts and there's certainly a lot to be learned from both people.

Buffett, arguably the world's most successful investor, has made a career of buying and holding great businesses at discounted valuations through his holding vehicle, Berkshire Hathaway. Jay-Z is a rap artist turned music mogul who now runs Roc Nation - a music management and publishing company that has all hands in the promotional aspect of a musician's career. This interview is great reading for all people but would especially appeal to, and benefit, Gen Y.

Gold Prices & Gen Y

I'm always interested in all types of investment and economic indicators. Watching gold futures prices hit an all-time high yesterday told me that most people are still worried about inflation (gold, as a hard asset, protects against this evil) as well as general economic malaise. 

It's amazing how we can get conflicting economic numbers and statistics telling us a recovery may be near and then see gold prices skyrocket to over $1,300 an ounce. To me, that means investors are still skittish and we have a long way to go before we're going to see serious economic growth again. The signals gold is giving us proves that all types of indicators are important when watching the economy. I've been following these indicators now more than ever because the longer the economy takes to recover, the longer jobs growth will take to recover,  which in turn has drastic implications for Generation Y.

Why Timing the Market is a Bad Idea

Over the weekend, The Wall Street Journal's James B. Stewart wrote an article entitled, "How to Time the Stock Market". Naturally, I'm skeptical of any system that pledges to consistently "outperform a simple buy-and-hold index approach" as the article states. With that said, Stewart goes through a system which he describes as follows:

"Here is how the system works: When the market is dropping, I buy stocks at intervals of 10% declines from the most recent peak. When it is rising, I sell at intervals of 25% gains from the most recent low. These figures are roughly one-half the historical average losses of 20% in bear markets and gains of 50% in bull markets since 1979. They are round numbers and the math is easy to do in your head."

Here's the problem: there's an emotional aspect to this "system" that will ruin most investors who engage in it. Not all people will be as disciplined as Mr. Stewart is in implementing his system and the result will be severe underperformance for investors who do not have the discipline to stick to the system and instead incur high fees and trading costs which eat profits.

Worse still, if any of your stocks have rapid movements and you're forced to buy/sell often, you'll incur short-term capital gains taxes, which, depending on your tax bracket, can be as high as 35%! This will quickly destroy any of the value such a market timing system would have for you. Lastly, who has the patience to market time? It's unlikely that Gen Y wants to be bothered with setting up models to help them determine which stocks are rising and falling from valleys and peaks. More importantly, we have bigger obligations like school and work to deal with. With that said, it's best just to buy the entire market via an indexing strategy that's low-cost and won't keep you up at night.

Flurry of M&A Activity May Help Gen Y

This morning's flurry of M&A activity - Unilever NV (UN) purchased Alberto-Culver (ACV), Southwest Airlines (LUV) bought AirTran (AAI) and Wal-Mart (WMT) acquired a South African consumer goods company - indicates that an economic recovery may come sooner rather than later. After all, the aforementioned companies are excellent barometers for the overall economy because Unilever and Wal-Mart both sell consumer goods and Southwest is in a very cyclical industry. In fact, the biggest news may be that Southwest - one of the leaders in the airline industry - was willing to put up $1.4 billion to buy AirTran, even as other rivals are cutting routes and in some cases, filing for bankruptcy.

To see these companies putting up billions to acquire other firms is a sign that they are comfortable with getting rid of some of the cash on their balance sheets that they had hunkered down with to help combat the recession. Any large outlay of a cash by a firm for an acquisition at this point of the economic cycle is a sure sign that they are confident enough in their ability to generate cash from operations going forward to help fund it.

With that said, this news also has plenty of importance for Gen Y because the potential for an economic recovery means that the job market may recover sooner rather than later. Granted, the recent employment reports have indicated prolonged sluggishness remains, but the confidence on the part of large companies in expending billions of dollars to buy other firms suggests that the next logical step will be the creation of new jobs both at those companies and across the broader economy.

Economic News is Getting Better

This morning's durable goods report - the report regarding the investment companies make in capital assets like machinery, equipment and the like - showed that for the third time in four months, businesses were getting more optimistic about investing in capital assets. The AP recount of the report says that "The 4.1 percent increase to capital goods in August signaled a rebound in business spending after orders fell 5.3 percent in July." As a result, the S&P 500 is up about 1.60% on the strength of the report.

It's hard to read too much into daily economic reports because each one measures a drastically different area of an incredibly large U.S. economy and because we're so often given conflicting reports about what the actual state of the economy is. Suffice it to say, the news is getting better, albeit slightly, so going into your weekend, remain optimistic that the economy is one step closer to picking up steam.

Where are Gen Y's Billionaires?

Today, Forbes magazine released its annual list of the richest 400 people in America - the much-anticipated Forbes 400 list. This list is the standard by which most extremely wealthy Americans tend to measure themselves. Granted, much of a billionaire's empire is hard to value given that wealth can be tied up in illiquid private securities or other assets, but Forbes does a pretty good job overall of estimating wealth.

Robert Frank at the Wall Street Journal points out something that should be obvious to anyone taking a good look at the list - there's a lack of young money. Indeed, the nouveau riche that was long talked about does not seem to be coming into fruition. Instead, we're seeing a continuation of old money and what Frank describes as "a hardening of the plutocracy". Yes, facebook's "Big Three" made it onto the list and the youngest member of the Forbes 400 is 26. Ultimately, though, it's clear that Gen Y is making little headway in reaching the upper echelons of wealth in this country. As Frank concludes, there were "no new billionaires from tech, or the Green Economy, or biotechnology or any other revolutionary product or industry" in the list.

Given the fact that any millennial who becomes a part of the list would have had a drastically shorter time frame to build such a vast amount of wealth, it may be a little while before their empires register on the Forbes 400 scale. By that time, perhaps they will constitute a new plutocracy.

The Billionaire Who Bought Burger King

Yesterday, Bloomberg had an interesting article on Brazilian billionaire Jorge Paulo Lemann, the 71-year old investor behind investment firm 3G Capital which just purchased fast food giant Burger King for $3.3 billion. Lemann's story is inspiring because he has had an entrepreneurial spirit his whole life, having founded an investment bank in Brazil at age 32 that was dubbed the "Brazilian Goldman Sachs". Besides his role as a banker and his recent acquisition of Burger King, Lemann was also an active player in InBev's purchase of Anheuser-Busch as he owned a substantial stake in InBev (and still does).