Warren Buffet Reveals His Treasury Bill Strategy
Summary
TLDRIn this episode of 'Father and Son Investing,' the focus is on Warren Buffett's weekly habit of purchasing treasury bills, a strategy that emphasizes the importance of maintaining cash reserves. The video explains what treasury bills are, their advantages such as being risk-free and highly liquid, and the tax benefits they offer. It also touches on the concept of building a treasury bill ladder for a steady cash flow and the current yields available. The discussion encourages viewers to consider this approach for sound financial management.
Takeaways
- đ Warren Buffett has a habit of buying treasury bills every Monday, which he considers a foundational part of his investment strategy.
- đŒ Treasury bills are short-term debt securities issued by the U.S. government, with maturities of 52 weeks or less.
- đ They are considered risk-free investments, backed by the full faith and credit of the U.S. government, making them a safe haven for investors.
- đ° The value of treasury bills is predictable, with a known maturity date and return, unlike stocks which can fluctuate in value.
- đ” Treasury bills offer tax advantages, being exempt from state and local taxes, which can enhance the effective return on investment.
- đ High purchase limits are available, allowing investors to buy up to $10 million per bill type per auction, catering to large-scale investments.
- đž They provide liquidity, similar to holding cash, with a wide market for quick sales, although this may sometimes result in a loss.
- đŹ Buffett emphasizes the importance of maintaining cash reserves, likening it to oxygen for businesses and individuals.
- đ The concept of dollar-cost averaging can be applied to treasury bills, smoothing out the average purchase price over time.
- đ Building a treasury bill ladder is a strategy that involves investing in bills with different maturity dates to create a regular income stream.
Q & A
What habit does Warren Buffett have every Monday?
-Warren Buffett has the habit of buying treasury bills every Monday.
What did Buffett say about habits during his 2007 address at the University of Florida?
-Buffett said that most behavior is habitual and that the chains of habit are too light to be felt until they are too heavy to be broken.
What is a treasury bill?
-A treasury bill is essentially debt that the United States government sells to individuals, banks, and other countries. It is a U.S. government debt with a maturity of 52 weeks or less.
What are the different maturities available for treasury bills?
-Treasury bills are available in maturities of 4 weeks, 8 weeks, 13 weeks, 26 weeks, and 52 weeks.
What is the minimum and maximum amount one can invest in a treasury bill?
-The minimum amount to invest in a treasury bill is $100, and the maximum is $10 million per type of treasury bill per auction.
Why are treasury bills considered risk-free?
-Treasury bills are considered risk-free because they are backed by the full faith and credit of the United States government.
What tax advantages do treasury bills offer?
-Treasury bills are not taxable by state and local governments, which can effectively increase the rate of return compared to other investments like high-yield savings accounts or certificates of deposit.
What is the importance of having cash on hand according to Warren Buffett?
-Buffett emphasizes the importance of having cash on hand, likening it to oxygen; it's not thought about when present but is crucial when absent.
What is a bond ladder strategy and how does it relate to treasury bills?
-A bond ladder strategy involves investing in treasury bills with different maturity dates. As each bill matures, the money is reinvested in a bill of a different maturity, creating a cycle of maturing and reinvesting.
How does buying treasury bills weekly relate to dollar-cost averaging?
-Buying treasury bills weekly is a form of dollar-cost averaging, as it helps to level out the average price paid over time, reducing the impact of market fluctuations.
What are the current yields for different maturities of treasury bills?
-As of the script's recording, the four-week treasury bill yield is relatively low at around 3.3 percent, while other maturities show higher yields, with the 13-week and 17-week bills being particularly attractive.
Outlines
đŒ Warren Buffett's Monday Habit: Investing in Treasury Bills
In this segment, the speaker discusses Warren Buffett's weekly habit of investing in treasury bills, a practice he revealed during a 2007 address at the University of Florida. The speaker explains that Buffett buys approximately two billion dollars' worth of treasury bills every Monday, choosing between three-month and six-month terms. The segment introduces the concept of treasury bills as debt instruments sold by the U.S. government with maturities of 52 weeks or less. The speaker also touches on the benefits of treasury bills, such as being risk-free investments backed by the full faith and credit of the U.S. government, having a known value at maturity, offering tax advantages, high purchase limits, and being highly liquid. The goal is to educate viewers on the habit and its potential advantages for their own financial strategies.
đ° The Importance of Cash and Treasury Bill Ladder Strategy
The second paragraph delves into the importance of maintaining cash reserves, using Warren Buffett's philosophy as a reference point. Buffett likens cash to oxygenâubiquitous and essential until it's absent. The speaker then explores the concept of dollar-cost averaging through weekly treasury bill purchases, which can help level out the average price paid over time. Additionally, the idea of a bond ladder strategy is introduced, where investors can create a diversified portfolio of treasury bills with varying maturity dates to ensure a steady income stream. The speaker concludes by discussing current treasury bill yields and suggests considering a ladder strategy with three-month or six-month bills as a potential investment approach. The aim is to encourage viewers to think about the role of cash in their financial planning and the potential benefits of a treasury bill ladder.
Mindmap
Keywords
đĄHabit
đĄWarren Buffett
đĄTreasury Bills
đĄYield
đĄDollar Cost Averaging
đĄCash on Hand
đĄRisk-Free
đĄTax Advantages
đĄLiquidity
đĄBond Ladder
đĄInvesting
Highlights
Warren Buffett discusses the importance of habits in investing.
Buffett's habit of buying treasury bills every Monday.
Treasury bills are considered risk-free investments.
Treasury bills are backed by the full faith and credit of the U.S. government.
Treasury bills have a known worth at maturity.
Tax advantages of treasury bills, as they are not taxable by state and local governments.
High purchase limits for treasury bills, up to $10 million per type per auction.
Treasury bills are highly liquid, similar to holding cash.
The importance of keeping cash on hand, as emphasized by Buffett.
Cash is compared to oxygen for businesses and families.
The concept of dollar-cost averaging through weekly treasury bill purchases.
Building a treasury bill ladder as an investment strategy.
The idea of reinvesting matured treasury bills into longer-term bills.
Current treasury bill yields and their comparison.
The potential of the three-month or 13-week treasury bill for investment.
The 17-week treasury bill as a four-month investment option.
Encouraging young people to invest early and make wise money decisions.
Transcripts
hi guys welcome back to Father and Son
investing today we're going to be
talking about a habit that Warren
Buffett has that he does every Monday in
a 2007 address at the University of
Florida they had this to say said most
behavior is Habitual and they say that
the chains of habit are too light to be
felt until they are too heavy to be
broken today we're going to talk about
what that habit is and we'll talk about
whether it's something we should be
doing let's get to it well Becky
on Good Friday
I was working Mark Millard who handles
all the bonds in stock trades for the
whole
for all of Berkshire uh was there and I
knew I was leaving town on on Sunday
night and Marx's what do we do next week
and I said here's what we do and on
Monday we always buy treasury bills we
bought about two billion of them we got
a 499
percent Bond equivalent yield and but
the only question is whether we buy
three months or six months and then and
I tell them use his own judgment uh on
that
all right if you didn't pick up what
that habit is it's buying treasury bills
and he does it every Monday now you may
have heard in there that he just has to
choose whether he's buying the three
month or the six-month treasury bills
today we're going to talk about that
habit buying treasury bills each week
and what that might do for you
for this discussion we'll talk about
four things the first one will be very
briefly just what is a treasury bill I
know many of you are already buying them
but some of you may not and we'll
quickly touch on what those are the
second thing that we'll talk about are
just some advantages of treasury bills
the third thing we'll talk about is the
importance of keeping cash on hand and
what Mr Buffett had to say about that
and then the fourth thing will be what
buying treasury bills every week will do
for you
item number one what is a treasury bill
well a treasury bill is essentially debt
that the United States government or the
U.S treasury is selling to people like
you and me as well as to banking
institutions and even to other countries
now A treasury bill is U.S government
debt that is 52 weeks or less we call
that a treasury bill if it's more than
that it's either a note or a bond which
we're not going to talk about today
you can buy them in various flavors
essentially you can buy them in four
week eight week 13 weeks 17 week 26 week
and 52 weeks those are the the amount of
weeks to maturity you have to spend at
least a hundred dollars to buy a
treasury bill and you can spend up to 10
million dollars in treasury bills for
each type of treasury bill so you could
buy a 10 million dollars a four-week
treasury bill and 10 million dollars of
an eight-week treasury bill during the
same auction and these auctions take
place every week
that's the brief explanation if you want
more information you can go to treasury
direct and they have some good
information there about treasury bills
all right item number two there are five
advantages that I see to having treasury
bills now I actually did a video in more
in depth about this so I'm not going to
belabor this point too much but let me
just quickly talk about these five
advantages that I see number one it's
risk-free there aren't there really
isn't anything that's actually risk-free
but this is considered the risk-free
rate or the risk free investment out
there and that's because it's backed by
the full faith and credit of the United
States government now that would lead to
a discussion potentially about what
happens if the government defaults but
that's a different topic for a different
day number two is that the worth of this
investment is known meaning you're going
to buy a treasury bill and at its
maturity date you will know what it will
be worth which is different than
purchasing a stock
the third advantage that I see is that
treasury bills have some tax advantages
if you're not aware of it treasury bills
are not taxable by state and local
governments so compared to a high-yield
savings account or a certificate of
deposit you can effectively increase
your rate of return by not paying taxes
to your state or local government the
fourth thing that I see is the really
high purchase limits that I talked about
10 million per type of treasury bill per
auction
knowing that this is a risk-free type of
investment I certainly do not fall into
this category necessarily but if you
have a lot a lot of money to spend on
treasury bills you're trying to save a
lot of money you can
increase your guarantee buying treasury
bills versus using an FDIC insured bank
account which is only insured up to 250
000 the last thing that I see for
treasury bills is that they're very
liquid it's pretty much like having cash
there is such a wide open market for
treasury bills that you can sell these
almost instantaneously to retrieve your
cash now that may come at a loss and if
you watch my other video I'll explain
that more in detail the third item then
for this discussion is the importance of
having cash on hand let's just refer to
what Mr Buffett had to say about having
cash
we will always have a lot of cash on
hand we have
treasure boats uh we would
we believe in having cash and
there are
I've been a few times in history and
will be more times in history where
where if you don't have it
you know you don't get to play the next
day I mean it uh
it's just uh uh it's like oxygen you
know it's there all the time but if it
disappears for a few minutes
it's all over
in the 2014 Berkshire Hathaway annual
report that cash quote went just a
little bit differently this is how it
read back then cash though is to a
business as oxygen is to an individual
never thought about it when it is
present the only thing in mind when it
is absent when bills come due only cash
is legal tender don't leave home without
it now he was talking about what cash is
like to a business but I would argue
that running a family is much like
running a business and having some cash
on hand is always going to be important
and when you don't have it it's going to
be the only thing you can think about
let's just talk then the fourth item of
discussion what would it look like if
you were buying treasury bills every
week well when we talk about buying a
stock every week or every month we talk
about dollar cost to averaging
essentially you're living leveling out
what your average price is that you've
paid for a stock in similar fashion if
you were to buy treasury bills every
week you would be dollar cost averaging
there is another way though to think
about treasury bills you may have heard
about a bond ladder it is possible to
build a treasury bill ladder as well
now essentially building a ladder is a
strategy to invest in treasury bills in
this case with different maturity dates
between the various weeks that I already
mentioned and as the short Bill matures
you then take that money and reinvest it
potentially in one that is longer but
you'll want to be paying attention to
the various yields of these treasury
bills the idea then is that every four
weeks or every eight weeks or every 13
weeks however you determine your
treasury bill ladder you have a bill
maturing and then you reinvest that
money in the treasury bill of your
choice let's just wrap up this
discussion by looking at what the
current treasury bill yields look like
in case you're thinking you would like
to build a treasury bill ladder
everything is looking really good
actually except for the four-week
treasury bill now these are the issue
dates and that's why it says 425 when
it's not quite the 25th of April yet but
the treasury bill that gets issued next
week is going to have a relatively low
yield compared to all the other treasury
bills you can see it's down here in the
3.3 percent range
everything else looking nicely in case
you're thinking you would like to build
a treasury bill ladder perhaps you want
to look at what Warren Buffett is doing
either the three month or the sixth
month I particularly like the three
month that 13 week treasury bill that's
the one here in Gray and I also like the
17-week treasury bill which you're
looking at more like a four month share
this type of information with a young
person in your life get them investing
early and making wise money decisions
and as always until next time enjoy your
investing
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