Eleven years ago Warren Buffett’s Berkshire Hathaway underwrote an insurance policy for a US$1 billion game show prize.
In return for underwriting the prize, Berkshire Hathaway received a US$10 million premium.
Despite the risk, the odds of Buffett’s firm having to pay out on the prize were slim, one million to one. In order to win the prize, the contestants had to have the same six-digit number as that selected at random…by a chimpanzee.
It’s no surprise that the contestants didn’t come close to winning this ‘monkey derivative’ as a Bloomberg reporter labelled it (we’ll excuse the reporter’s error in confusing a monkey with a chimp). The billion-dollar prize went unclaimed and Warren Buffett’s Berkshire Hathaway got to keep the US$10 million premium.
Well, despite his reputation as a conservative value investor it seems Buffett’s appetite for risky bets hasn’t diminished. This week Berkshire Hathaway revealed it’s underwriting another billion-dollar bet…
This time the bet appears even safer. In order to claim the prize the winner needs to correctly predict the winning team in all 67 games of the US NCAA college basketball tournament.
The odds of anyone winning are nine quintillion to one (that’s a 9 with 18 zeros!).
It’s not clear how much Berkshire Hathaway will receive in premiums this time. But it’s likely to be in the millions of dollars.
If you’ve got the capital to guarantee a one billion dollar prize pool in return for a few million dollars in premiums on events with an almost impossible chance of occurring, then heck, that’s a good money-spinner.
But these types of opportunistic income streams aren’t available to most investors. Most investors have to rely on more conventional ways to earn an income.
However, if you put your mind to it, there is a way to create an income stream where, like the Buffett bets, the odds are stacked in your favour – and thankfully it doesn’t involve chimps or monkeys…
Our old buddy Nick Hubble is one of the smartest thinkers we know.
He’s always coming up with intriguing ways for investors to safely save for retirement. But saving for retirement is only half the story.
It’s also important for retirees to earn money in retirement without taking unnecessary risks.
It’s something most people don’t think about. They think that once they’ve saved a bunch of cash during their working lives that’s where things end. But it’s not.
Earning an income in retirement is just as important as earning an income during your working life. Here’s why.
Think about it this way. If you gave up work today, how would you fund your lifestyle?
If you don’t have an income you’d have to sell your possessions – your home, car, jewellery, furniture, and so on. That would probably get you by for a while. But what would you do after you’ve sold every last thing you own?
You’d have to go back to work. That may be easy to do when you’re in your 30′s, 40′s, or even 50′s. It may not be so easy when you’re in your 60′s, 70′s or 80′s.
The simple fact is that if you have to use your capital, you’re slowly eating away at your income producing assets. And once you’ve sold your capital you can’t earn an income from it.
That’s where Nick’s income strategy enters the frame.
Our view is that investors should have up to half of
their investible assets in stocks. This should be a combination of growth and income stocks.
The rest of your investible assets should be in a combination of cash and gold. The amount you decide to allocate to each of these asset classes is up to you depending on such things as your attitude to risk and your age.
The problem with stocks of course is that sometimes they can fall in value. Falling markets usually happen because company profits fall. When company profits fall it can result in lower dividend payouts, which can mean a lower share price.
If you’re a retiree who depends on dividends for income that can be a problem. If the dividends no longer meet your living expenses you may have to sell shares to make up the difference. Except of course, if the share price has dropped you have to sell your shares at a lower price than you’d like.
That’s a double punch in the teeth, because as we mentioned before, if you sell your capital it means you’re selling an income-producing asset at a knockdown price.
That’s where Nick came up with the idea of what he calls a ‘security ladder’.
He explains how it works in a report he’s prepared for Money Morning readers. You can check out the details here.
Simply put, it’s a neat strategy that involves investing in a particular type of security (not shares) that’s almost guaranteed to pay you a return.
In fact, you could even say it’s a ‘government-backed’ guarantee. Of course, that doesn’t have the same cast-iron assurance that it used to have. But where these particular securities are concerned, government backing does count for something.
Frankly, Nick’s ‘security ladder’ strategy is about as good as it gets when it comes to locking in a steady income stream.
Hitting retirement and then working out how to pay for your lifestyle for another 20, 30 or even 40 years after you retire can be a daunting thought. And planning for it isn’t something you should take lightly.
So if there was a way to reduce the worry and invest in a secure and reliable income stream, without having to worry about the ups and downs of the stock market, well, we can’t think of a single person who wouldn’t want that level of income security.
We love stocks as a great way to earn an income. But we also know they can be risky and volatile at times. Nick’s strategy doesn’t replace stocks. It’s a complementary way to achieve a virtually guaranteed income stream during times of stock market volatility.
It’s worth checking out.
Cheers,
Kris+
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