A Detailed Peek Inside My Investment Strategy: How Do I Invest And Why?

by | BiggerPockets.com

I do the opposite of what the FINANCIAL EXPERTS say to do!

I am going to apologize in advance for the length of this post, but I think some explanation is needed when you [as many other on here do]invest differently than most of the financial industry thinks you should. I keep my investing fairly simple and don’t over think it, nor spend every day looking up the values. I analyze the results and how it all fits together a couple times a year. Further, I have been blogging on this since 2007 so my results are easily documented since then.

In the mid 1990s I was doing exactly what the financial experts of the time told me I should do; Invest in mutual funds inside a 401k/IRA wrapper. However, since then I have made drastic changes. I had to wait to quit a job to get ahold of my 401K money, so that took a while to get that money into a place that I was happy with. Here is an outline of what I have:

  • Equities
  • BRKb Berkshire Hathaway
  • MMP Magellan Midstream Partners
  • Real Estate
  • HCN- Health Care REIT
  • Farm Acreage
  • EIUL

I am sure you see some real differences between what I do and what the experts say to do!!

My Thinking Behind My Investment Strategy: Berkshire Hathaway

Berkshire Hathaway is the largest holding I have by value, representing somewhere around 60% of my total investable funds. I started accumulating it in the late 1990s and have never looked back. After much research back then [it was library work back in those pre-internet days]I came to the conclusion that if Warren Buffett was willing to invest for me for a princely salary of $100,000 who was I to say no. When I started to accumulate the stock, the price [adjusted for splits]was around $30. It currently sits a little over $100 at $103.33. So those early shares I bought have tripled in value in 14 years, producing a return of around 9.24%. By the way, using Buffett’s book value as a measure of value the stock has gone up 448% since I started buying or 11.31% average per year. Either value is fine with me, considering the last 10 years the overall market has basically been flat. I still think the stock is a little undervalued considering it’s return on equity is over 10% and it has over $73B of free money to invest [float from insurance operations].
Frankly, it has been producing so much cash over the last 5 years that Buffett has not been able to put it all to work.

Now the experts would say it is crazy to have so much of my portfolio invested in 1 stock, but to me that is nonsensical. This stock has over 60 diverse businesses in it that range from a railroad, to energy, insurance, and candy. It is so well diversified itself that no single issue could possibly destroy its ability to create cash flow. On top of that it has invested in more than 20 equities, but the majority of equity ownership is in 4 [American Express, IBM, Wells Fargo, Coca-cola]. All pay increasing amounts of dividends to Berkshire. The death of Warren Buffett might temporarily decrease the stock price, but it will do nothing to stop the cash from flowing in. Berkshire pays no dividends itself so this is my main growth provider. I’ll take the 9.24% average return, but would like to see that pop up over 12% in the future and believe it will.

My Other Income Strategy: Income Producers

The next category is those that produce income. Once again I am pretty concentrated with only 3. I have a petroleum product transportation and storage company called Magellan Midstream Partners. I began acquiring this in 2008 when the price was incredibly low and only continued to buy for about 18 months. Hence, my yield to cost is 15%. As a bonus this stock has gone up in price from an average acquiring cost of $17.90 to $49.74 or an average price growth of 22.68%. Frankly, I never expected this type of growth and purchased it for its income stream. The dividend yield has gone up substantially over the last couple years and is predicted to maintain this torrid pace of increasing dividends for the next couple years. Note this company stores and transports oil products and does not refine them. Because some of the transportation of oil products is regulated the toll price gets automatic increases every couple of years making the income stream more consistent. As we are using less refined products, MMP has started to lessen the transportation of refined products and have increased their transportation of crude oil resulting from the Midwest Shale Oil. This is proving to be productive in both the transportation segment and the storage segment for MMP. Long term I will keep a close eye on the use of oil products, but in the short run I don’t see any big decreases coming down the line with these pipelines MMP owns. MMP is not price sensitive to the actual price of oil as many of the energy companies are. The main threat is to a large overall decrease in usage.

My Real Estate Investment Strategy

I have been investing in a Real Estate Investment Trust since the late 1990s. This REIT [HCN] invests in Health Care Facilities. Most of the stock was bought in the early 2000s. Since I bought this at a time when the sector was out of favor, my yield to cost is high at 16%. This despite dividends increasing an average of only 2.8% over the last decade. The low rate of dividend increase is of course concerning. Part of the reason for that is the 2008-2010 real estate crash that kept dividends from increasing. The other part is that the company has been on an acquiring spree finding several billions of dollars of high quality facilities to buy as they divest themselves of many of the nursing homes they owned in favor of medical office buildings, acute care clinics and senior housing campuses that offer higher returns. They also strategically own properties in high price areas of mostly big cities. But, if the dividends don’t start to increase in the 5-6% range over the next few years as the new strategy is implemented, then I will look to move my money to a place that the dividends increase faster. Obviously as someone who understands demography, health care is going to be a huge growth area and they will need someplace to perform the care. I think this area of investing is a no-brainer, just a little concerned with the low rate of dividend increase. Obviously, so far I am doing well with this income producing asset.

The final piece is farmland. Frankly, my yield to price on this is only in the 4% range. Since it is such a small part of my overall portfolio, it doesn’t drag down the overall income yield much. But, I think farmland is important to our economy, they don’t make more of it, and large corporate farms have pushed the envelope on yield about as far as they can, therefore there is always going to be a place for small farms. One consideration going forward is to see if there are some enterprising folks who might want to turn it into an organic farm for the Indianapolis or Evansville markets. But, for now I am happy having it be a small part of a farmers overall crops that he rents and farms.

With my overall income yield to cost at over 12%, I am satisfied with the results. One area I want to work on is to add significantly to this side of my portfolio. I hope to get the income generated into a place I can live on before retirement, but I have a long way to go at this point.


I have a fairly large Equity Indexed Universal Life policy. This was bought 8 years ago and is almost fully funded. It is with AVIVA, which is not currently a top performer, but is working more than adequately for me, so no need to change it to Minnesota Life at this time. The average interest credit since I bought this is around 7%. Not bad considering how bad the overall index has looked over this time period. The big reasons why I own this are taxes and “sequence of return” risk. As you all might know, money taken out of an EIUL comes without a tax obligation. This can save me up to 40% in taxes on the income when I decide to take it out. The index credit never goes negative, so I don’t have to worry about the market crashing close to when I need to use this money. That takes a huge worry away from me and adds flexibility. The final result is that income derived from my EIUL could be 60-80% higher than if it sat in an equity mutual fund inside an 401K. Incidentally, I don’t list this as an income producing asset, despite that is what I intend it for. I hope to have my basic needs covered with other assets and use this for extra’s and emergencies that might come about during my retirement.

Simple, yet Elegant?

I will let the reader decide this question. But, looking at the overall picture, it should be fairly tax efficient, have the ability to easily convert to income, and so far has produced double digit returns no matter how one looks at it. It also has less risk in my opinion. Compare that to what I was doing previously, you have serious outperformance [the stock market indexes have gone up around 3-4% annually in that time period. I don’t diversify my stocks but instead concentrate on a few good companies [thanks Warren for that tip], I don’t plan on pushing off my entire tax obligation until retirement, and I don’t listen to that financial advice being thrown around. In fact, the day I left that advice behind is the day I started to do well.

The Future?

I want to increase my income producing section significantly. This might mean joining you folks in investment single family houses or notes? Or it might mean purchasing a couple more stocks that have increasing dividends?

Hope this read was worth it for those of you that made it through the whole post. Remember, this is only one man’s idea’s of how to invest, provides no advice as to what works for you, nor is it the only way that works. It just works for me!

How do you invest your money? Leave your comments below!

Happy Investing!

Photo: Tax Credits

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  1. Well actually you are doing what the experts a say. Warren Buffet is an expert, better to realize you are doing the opposite of what the financial media is telling the herd to do.

    This goes both ways, during the run up in RE the media was in love with flippers (tv shows), later it was a bubble about to burst, and then all investors and their schemes were evil, and now real estate is once again the media darling.

    As Mater Po said to his student “Grasshopper you lack one thing”…

    Stocks even those that pay a dividend can be static investments on occasion, and I am sure you know there is going to be “blood in the streets” in all markets as the Bernanke bubble (the effects of QE liquidity) eventually bursts.

    What possibly you lack is a solid foundation in options trading around your portfolio. If options are profitable in RE, can you imagine how they can effect your returns on stocks?

    Focus in on Solid Foundation. It drives me a bit nuts reading blogs on this site that bash the stock market as too risky, too hard to learn, when the author has not spent on second in study, but has no problem consuming all there is to know on their niche or REi in general.

    That being said, how many on this blog would go from wholesaling residential shells to purchasing a 10 acre shopping mall? No takers why not? To hard, to risky, to time consuming to learn?

    When was the last time you had to plunge a toilet at Berkshire Hathaway?

  2. Nice article, but I would agree with the comment above. You are very diversified as far as stocks, but isn’t that what we are constantly told told invest in all our lives? I firmly believe the road to early retirement is through real estate and long term investing. The returns are much higher and much more predictable as long as you aren’t counting on appreciation which I do not.

    I know everyone’s market is different, but I am seeing 20% ROI from just cash flow in the first year on my rentals. That doesn’t factor in the other benefits like tax savings from depreciation, mortgage pay down and appreciation.

    • John, don’t know the answer to your question. Investing in farmland requires someone that can farm the land and those folks would be the people to talk to about any investment. Good farmers are critical to your success.

  3. jeffrey gordon on

    David, just got off the phone with a “real” farmer I spent my 14th summer working for in 1968 at a farm my dad and two other docs bought as an investment. Farmer Bill is long retired and a larged extended family of daughters and son in laws now farm 1200 acres in central washington. Back in 1968 bill was a share cropper renting the ground from my dad and his partners as Bill had come from Nebraska to Washington state to try and get his own rig going.

    In the early 80’s bill bought the “row” crop land from dad and the partners–they had developed the other half of the farm into tree fruits–think Washington Apples, Cherries and Pears. Bill paid about $900/acre in 1982 for the land and continued to grow corn, wheat, potatoes, sugar beets, dried peas etc on irrigated land and did well enough to be chosen Washington State farmer of the year at least once–that summer riding around in the truck with him irrigating and driving tractor and harvesting etc. and talking farming and life is still one of the special experiences in my life!

    In the mid 80’s Bill starting converting the ground he bought from us into apple orchards and proceeded to add an additional section of land to his holdings and today the kids are farming almost exclusively permanent crops and mostly apples.

    Life has been good for Bill farming. The land is paid for, they have the best equipment and it is mostly paid for and the land is setup to remain in the family for a long time and be farmed by one of the great kids for a long time.

    He told me that currently similar land to his irrigated holdings are selling for $12,000 an acre as more an more demand for fresh fruit around the world and increasing development of 6,000 tree per acre vs the old 200 tree per acre strategy has allowed the most productive land to become very very valuable.

    While Bill has had that land a long time, and average return might seem average, the point to get is that most of that value increase has occurred in the last 5-10 years when it has gone from $3,500 to $12,000 per acre.

    Farm land is not for everyone, but living on 400 acres of timber myself, I can attest to not only the long term stability and value of productive ag land, but the quality of life–as the quote goes, “they aint making any more of it!” And well located irrigated farm land with good soil and exposure is only going to be more and more valuable going forward as folks around the world continue to increase their standard of living.

    thanks for the overview of your portfolio results, and good luck to your dream of living on that land somewhere sometime soon–as always hope springs eternal each spring with the promise of another season hopefully culminating with a bountiful harvest!


  4. Warren Buffet just started his own RE brokerage, and already owns Prudential so we all know he has interests in REI.

    He gave some advice a while back when asked what would be a good investment for a young person with little to invest. His replied to buy rental property or a home as the money needed is being lent at just about “free” interest rates.

    This is why the hedge funds and large Wall Street players are in on rental housing, they can borrow directly from the Fed at just about zero interest rates and the loans are Federally guarantee. This is one reason why I will be cautious all the way up the new bubble, we have seen in the past what happens when buyers have no skin in the game.

  5. I certainly agree that being contrarian is important. It’s tough to argue with Berkshire, but Buffett won’t live forever and no company is the same when the founder passes (see Apple). My issue is you’re in equities, a REIT, and insurance also tied to equities. I’ve seen too much over time and don’t trust wall street (or anyone in finance really). I’ve got a few equities only because I haven’t taken the jump to cash out my 401k’s. I’d prefer to own my companies or income producing real estate that may also appreciate. Owning stock in a few companies that you can trust helps some, but you’re still much too overweight in equities for my liking.

  6. Very interesting info. In my case, real estate is 80 % of my investment, and wife handles the rest with mutual funds. Enjoying retirement at 71 with NNN Walgreen’s, no headache. Started investing in 1972 with 8 plex, and than 12 units, and onto commercial property.
    failed badly with TIC’s investment, but overall real estate was the savior for happy retirement, and no taxes to pay, due to depreciation write-off.

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