Warren Buffet Reveals His Treasury Bill Strategy

Summary

In 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

• 📈 Warren Buffett has a habit of buying treasury bills every Monday, which he considers a foundational part of his investment strategy.
• 💼 Treasury bills are short-term debt securities issued by the U.S. government, with maturities of 52 weeks or less.
• 🔐 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.
• 💰 The value of treasury bills is predictable, with a known maturity date and return, unlike stocks which can fluctuate in value.
• 💵 Treasury bills offer tax advantages, being exempt from state and local taxes, which can enhance the effective return on investment.
• 🚀 High purchase limits are available, allowing investors to buy up to $10 million per bill type per auction, catering to large-scale investments.
• 💸 They provide liquidity, similar to holding cash, with a wide market for quick sales, although this may sometimes result in a loss.
• 💬 Buffett emphasizes the importance of maintaining cash reserves, likening it to oxygen for businesses and individuals.
• 🔄 The concept of dollar-cost averaging can be applied to treasury bills, smoothing out the average purchase price over time.
• 📊 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

00:00

💼 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.

05:00

💰 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 oxygen—ubiquitous 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.

Keywords

💡Habit

A habit is a routine behavior that is repeated regularly and tends to occur subconsciously. In the video, Warren Buffett emphasizes the importance of habitual behavior in investing, specifically his routine of buying treasury bills every Monday. The concept is used to illustrate the power of consistency in financial strategies, suggesting that habits can lead to successful long-term outcomes.

💡Warren Buffett

Warren Buffett is a renowned American investor, business tycoon, and philanthropist. He is the chairman and CEO of Berkshire Hathaway and is considered one of the most successful investors in the world. The video references Buffett's investment habits, particularly his practice of buying treasury bills, to highlight the strategies of a successful investor.

💡Treasury Bills

Treasury bills are short-term debt securities issued by the United States government. They are considered low-risk investments because they are backed by the U.S. government. The video discusses Buffett's habit of purchasing treasury bills, highlighting their role in a diversified investment portfolio and their advantages such as liquidity and tax benefits.

💡Yield

Yield in the context of treasury bills refers to the return on investment, typically expressed as a percentage. The video mentions the yield of different treasury bills, which is a key factor in deciding which bills to purchase. A higher yield means a greater return on the investment, making it an important consideration for investors like Buffett.

💡Dollar Cost Averaging

Dollar cost averaging is an investment strategy where a fixed amount of money is invested at regular intervals, regardless of the asset's price. The video suggests that buying treasury bills weekly is a form of dollar cost averaging, which can help to mitigate the impact of market volatility and reduce the risk of investing a large sum at the wrong time.

💡Cash on Hand

Having cash on hand refers to maintaining a reserve of liquid assets that can be readily accessed. The video quotes Buffett discussing the importance of cash for businesses and individuals, likening it to oxygen—essential when needed but often overlooked. This concept is central to the video's theme of prudent financial management.

💡Risk-Free

A risk-free investment is one where the return is guaranteed, and there is no risk of loss. The video describes treasury bills as 'risk-free' because they are backed by the full faith and credit of the U.S. government. This term is used to contrast treasury bills with other investments that may carry higher risks.

💡Tax Advantages

Tax advantages refer to the benefits that certain investments have in terms of reduced tax liabilities. The video points out that treasury bills are not subject to state and local taxes, which can enhance their overall return compared to other investments like savings accounts or certificates of deposit.

💡Liquidity

Liquidity in finance refers to the ease with which an asset can be converted into cash without affecting its price. The video mentions the high liquidity of treasury bills, meaning they can be sold quickly and easily, providing investors with quick access to their funds if needed.

💡Bond Ladder

A bond ladder is an investment strategy that involves purchasing bonds or, in this case, treasury bills with different maturity dates. The video suggests building a treasury bill ladder as a way to manage cash flow and diversify risk. As each bill matures, the investor can reinvest the proceeds, potentially in a bill with a different maturity, creating a steady stream of maturing investments.

💡Investing

Investing involves allocating resources, such as money, with the expectation of generating an income or profit. The video's theme revolves around investing, specifically the strategies of Warren Buffett, and how regular investment in treasury bills can be a part of a successful investment portfolio.

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