For investors as a whole, returns decrease as motion increases.
March 9, 2006 6:07 AM Subscribe
How to Minimize Investment Returns. (2.31 mb pdf file, page 18) In Berkshire Hathaway's annual report to shareholders, chairman Warren Buffet, the Sage of Omaha, the Most Successful Investor in the World, the one-time second most wealthy person in America, and advisor to John Kerry's presidential bid observes that "[a] record portion of the earnings that would go in their entirety to owners.. is now going to a swelling army of [brokers, managers, and consultants.]" Buffet warns that "costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have." (emphasis in the original)
Monju, I don't think that's what he meant by "Helpers"; I think he was referring to mutual fund managers, investment consultants and the like.
posted by Bezbozhnik at 6:42 AM on March 9, 2006
posted by Bezbozhnik at 6:42 AM on March 9, 2006
OK monju, but with regulatory compliance there's at least arguably some systemic benefit: no more Enrons (unless we're gonna argue that SOX etc aren't effective, but that's another conversation). With "Helpers", as Buffett calls them, there's just a net drag on the equity-holding population. Brokers and portfolio managers don't make companies more efficient or less corrupt; as he noted, all they can possibly do is redistribute the pie from one party to another, and only after taking a cut for themselves.
posted by rkent at 6:43 AM on March 9, 2006
posted by rkent at 6:43 AM on March 9, 2006
Monju, I don't think that's what he meant by "Helpers"; I think he was referring to mutual fund managers, investment consultants and the like.
I understand, I was just pointing out a second set of direct costs to corporations that affects investment returns for all investors, not just those who choose to utilize the services of "Helpers." Even if regulation deters a second Enron, a debatable proposition, the regulation may be restrictive past the point of diminishing returns.
OK monju, but with regulatory compliance there's at least arguably some systemic benefit: no more Enrons (unless we're gonna argue that SOX etc aren't effective, but that's another conversation). With "Helpers", as Buffett calls them, there's just a net drag on the equity-holding population.
I agree that the aim of regulation is at least to provide a systemic benefit. As you say, the effectiveness is for another convesation. I will note, however, that even if effective, the costs of compliance can deter small companies from going public, or can cause small already-public companies to go private.
Also, Buffett asserts that the "Helpers" are a net drag, but doesn't really offer any evidence to suggest that's true. First, if Helpers create markets in which capital is more liquid, thereby facilitating investment, you could very well see an increase in the wealth concentrated in equity securities. Second, even assuming that that the "Helpers" are a net drag on the cumulative wealth held in equity securities, there is no evidence that the holdings of an individual investor who foregoes those services will outperform the holdings of those who do not. In other words, if I'm an individual investor, why should I care if there is a net loss to the cumulative wealth concentrated in equity securities if my portfolio sees a gain?
posted by monju_bosatsu at 6:57 AM on March 9, 2006
I understand, I was just pointing out a second set of direct costs to corporations that affects investment returns for all investors, not just those who choose to utilize the services of "Helpers." Even if regulation deters a second Enron, a debatable proposition, the regulation may be restrictive past the point of diminishing returns.
OK monju, but with regulatory compliance there's at least arguably some systemic benefit: no more Enrons (unless we're gonna argue that SOX etc aren't effective, but that's another conversation). With "Helpers", as Buffett calls them, there's just a net drag on the equity-holding population.
I agree that the aim of regulation is at least to provide a systemic benefit. As you say, the effectiveness is for another convesation. I will note, however, that even if effective, the costs of compliance can deter small companies from going public, or can cause small already-public companies to go private.
Also, Buffett asserts that the "Helpers" are a net drag, but doesn't really offer any evidence to suggest that's true. First, if Helpers create markets in which capital is more liquid, thereby facilitating investment, you could very well see an increase in the wealth concentrated in equity securities. Second, even assuming that that the "Helpers" are a net drag on the cumulative wealth held in equity securities, there is no evidence that the holdings of an individual investor who foregoes those services will outperform the holdings of those who do not. In other words, if I'm an individual investor, why should I care if there is a net loss to the cumulative wealth concentrated in equity securities if my portfolio sees a gain?
posted by monju_bosatsu at 6:57 AM on March 9, 2006
Meh. Buffet seems to ignore one of the largest drags on corporate profits, and therefore also on investment returns: SOX and other regulatory compliance costs.
Well, SOX obviously is a part of where these consultancy fees are being eaten up.
On that note One of the things that bugs the hell out of me about D.C is that whenever anything "bad" happens the legislature wants to pass a shitload of new laws. Enron, the Abramhoff thing: the response is to pass a shitload of new laws, rather then coming up with better ways to enforce the current laws.
9/11 and Katrina were similar. After 9/11 they totally rejiggered the whole security apparatus into the department of homeland security. Then Katrina proved that the whole thing still didn't work properly. I think the whole rearrangement caused problems in the first place, because no one knew who was in charge and no one knew how to do things.
The reason for this, In my opinion, is that senators and congressmen want to look like they're "doing something" but all they're doing is rearranging deckchairs on the titanic, and muddying up and confusing things.
posted by delmoi at 6:59 AM on March 9, 2006
Well, SOX obviously is a part of where these consultancy fees are being eaten up.
On that note One of the things that bugs the hell out of me about D.C is that whenever anything "bad" happens the legislature wants to pass a shitload of new laws. Enron, the Abramhoff thing: the response is to pass a shitload of new laws, rather then coming up with better ways to enforce the current laws.
9/11 and Katrina were similar. After 9/11 they totally rejiggered the whole security apparatus into the department of homeland security. Then Katrina proved that the whole thing still didn't work properly. I think the whole rearrangement caused problems in the first place, because no one knew who was in charge and no one knew how to do things.
The reason for this, In my opinion, is that senators and congressmen want to look like they're "doing something" but all they're doing is rearranging deckchairs on the titanic, and muddying up and confusing things.
posted by delmoi at 6:59 AM on March 9, 2006
OK monju, but with regulatory compliance there's at least arguably some systemic benefit: no more Enrons (unless we're gonna argue that SOX etc aren't effective, but that's another conversation). With "Helpers", as Buffett calls them, there's just a net drag on the equity-holding population. Brokers and portfolio managers don't make companies more efficient or less corrupt; as he noted, all they can possibly do is redistribute the pie from one party to another, and only after taking a cut for themselves.
Thats true, but figuring out what to invest in can be a challenge as well. If I had $2m, and I invested it myself, I might not make anything. If bought into a fund, I might not make as much as I would if I'd known exactly what to invest in, but on the other hand, I might make more total profit then before.
posted by delmoi at 7:01 AM on March 9, 2006
Thats true, but figuring out what to invest in can be a challenge as well. If I had $2m, and I invested it myself, I might not make anything. If bought into a fund, I might not make as much as I would if I'd known exactly what to invest in, but on the other hand, I might make more total profit then before.
posted by delmoi at 7:01 AM on March 9, 2006
Compliance costs, while rising about 10% due to SOX over the next 2 years are a) often unknown by the companies at this point and b) only account for about 6% of administration budget and thus often are immaterial to corporate profits. The problem is of course, that small companies are hit harder than larger. In fact, European companies spend more.
Buffet is a very smart man and his take on the reduction of shareholder value by modern management in this vignette is spot on. The BRK Annual is usually an informative read in general, thanks for the link, TBM.
posted by sfts2 at 7:07 AM on March 9, 2006
Buffet is a very smart man and his take on the reduction of shareholder value by modern management in this vignette is spot on. The BRK Annual is usually an informative read in general, thanks for the link, TBM.
posted by sfts2 at 7:07 AM on March 9, 2006
monju: there is no evidence that the holdings of an individual investor who foregoes those services will outperform the holdings of those who do not.
delmoi: If bought into a fund, I might not make as much as I would if I'd known exactly what to invest in
Once you recognize that portfolio managers are a net drag and can only redistribute gains from one equity holder to another, it seems like the burden would be on a particular manager to demonstrate that he could consistently be on the winning side of such transactions. And even if my manager puts me 5% ahead of the market one year, and 4% behind the next year, I still don't want to hire him if he's taking a 1% fee. I think any particular investor should at least look at passively managed funds like broad indices to see if their performance is really any worse than actively managed funds with steep fees.
I would definitely concede, though, that once you're wealthy enough that you can stand the risk of small caps or private equities, it probably pays to get a broker who knows what's going on in that area rather than just poking around blindly. I'd still argue that it would make more sense both distributionally and efficiency-wise to make tradable indices of these types of investments and let every one have at 'em.
And another way to read Buffett's statement is that rather than saying "I'm not going to be stupid and hire any damn manager," he's setting forth a case for regulations restricting the fees taken by managers and brokers.
posted by rkent at 7:13 AM on March 9, 2006
delmoi: If bought into a fund, I might not make as much as I would if I'd known exactly what to invest in
Once you recognize that portfolio managers are a net drag and can only redistribute gains from one equity holder to another, it seems like the burden would be on a particular manager to demonstrate that he could consistently be on the winning side of such transactions. And even if my manager puts me 5% ahead of the market one year, and 4% behind the next year, I still don't want to hire him if he's taking a 1% fee. I think any particular investor should at least look at passively managed funds like broad indices to see if their performance is really any worse than actively managed funds with steep fees.
I would definitely concede, though, that once you're wealthy enough that you can stand the risk of small caps or private equities, it probably pays to get a broker who knows what's going on in that area rather than just poking around blindly. I'd still argue that it would make more sense both distributionally and efficiency-wise to make tradable indices of these types of investments and let every one have at 'em.
And another way to read Buffett's statement is that rather than saying "I'm not going to be stupid and hire any damn manager," he's setting forth a case for regulations restricting the fees taken by managers and brokers.
posted by rkent at 7:13 AM on March 9, 2006
Wow. Look at page 3 of that PDF. BRK.A's growth in 2005 was only 6.4%.
Indeed, dispite their 28% APR between 1965 and 2005, from 1995 to 2005 it's only been about 10%. Which is good, but hardly BRK.A good. Has buffit lost his magic?
Also last years letter about their zinc reclamation program was interesting. They were trying to extract zinc from the output of one of their power plants, and failed.
posted by delmoi at 7:13 AM on March 9, 2006
Indeed, dispite their 28% APR between 1965 and 2005, from 1995 to 2005 it's only been about 10%. Which is good, but hardly BRK.A good. Has buffit lost his magic?
Also last years letter about their zinc reclamation program was interesting. They were trying to extract zinc from the output of one of their power plants, and failed.
posted by delmoi at 7:13 AM on March 9, 2006
There's plenty of evidence that the average investor in a managed fund makes less than the average investor in an unmanaged fund. Managers beat the market rather less than 50% of the time. They do, however, make money for themselves 100% of the time.
If you're arguing that employing Helpers is good for you, all I can say is, read the annual report again and maybe you'll understand it. Buffett knows how money works, and if you think you know money better than he does, it should be a warning sign to you that you are ignorant.
posted by jellicle at 7:29 AM on March 9, 2006
If you're arguing that employing Helpers is good for you, all I can say is, read the annual report again and maybe you'll understand it. Buffett knows how money works, and if you think you know money better than he does, it should be a warning sign to you that you are ignorant.
posted by jellicle at 7:29 AM on March 9, 2006
Most of the comparisons of managed funds versus unmanaged funds predominantly look at the market during years in which it was rising. Everyone was making money then. I am not so sure of the wisdom of unmanaged funds during more turbulent times in the market. Of course buying BRK gets you a top manager without fees. I still think it is best to buy individual stocks if you have the time to do your own research.
posted by caddis at 7:49 AM on March 9, 2006
posted by caddis at 7:49 AM on March 9, 2006
Of course employing helpers is good for you. The relevant question is what kind of help is, well, helpful, and what kind is not. If I invest in an index fund, I'm still employing helpers to take my money and spread it around a broad group of investments that will mirror the market. I pay those helpers annually to do this. It's correct that most managed funds do not beat the market. But intelligent investors need not pick a managed fund at random and hope they picked one that will be a winner. Rather, they can do their homework and pick funds that have competent managers, a long-term perspective, and a proven history. Risky? Sure, but that's what investing is all about -- balancing risk and return. You might end up with a fund that lags the market. Or you might end up with Peter Lynch and Magellan, which averaged an annual 29% return over the 12 years he managed the fund.
posted by brain_drain at 8:17 AM on March 9, 2006
posted by brain_drain at 8:17 AM on March 9, 2006
monju_bosatsu writes "can cause small already-public companies to go private"
Or even big ones. $5+ billion dollar buyouts have been the latest rage. And buyout shops are continuing to raise even large pools of capital to invest - they need to go big to put all that money to work.
Anyway, I tried to read Buffet's letter yesterday but I had to stop on page 4 when he started talking about old people having sex.
posted by mullacc at 8:19 AM on March 9, 2006
Or even big ones. $5+ billion dollar buyouts have been the latest rage. And buyout shops are continuing to raise even large pools of capital to invest - they need to go big to put all that money to work.
Anyway, I tried to read Buffet's letter yesterday but I had to stop on page 4 when he started talking about old people having sex.
posted by mullacc at 8:19 AM on March 9, 2006
delmoi: A quick look at total returns from the S&P 500 shows a 7.7% compounded-annual growth rate since 12/31/95. BRK.a did 10.8%.
posted by mullacc at 8:35 AM on March 9, 2006
posted by mullacc at 8:35 AM on March 9, 2006
the one-time second most wealthy person in America
"One-time"? He still is. Not that the Forbes list is the most trustworthy -- they often just take people's word for it, which can be problematic in the case of say, Donald Trump.
posted by pmurray63 at 10:02 AM on March 9, 2006
"One-time"? He still is. Not that the Forbes list is the most trustworthy -- they often just take people's word for it, which can be problematic in the case of say, Donald Trump.
posted by pmurray63 at 10:02 AM on March 9, 2006
Only about 10% or less of money managers are really good. But if you hook up with them, you can get gigantic returns. Unfortunately, most of the really good money managers are only employed by the already mega-rich.
It's funny Buffett would say this as one of the most successful money managers of all time.
RE: Buffett advising Kerry, according to the biography I read, Buffett was a pretty loyal Republican until he and his late ex-wife became very involved in the pro-choice debate.
posted by b_thinky at 10:50 AM on March 9, 2006
It's funny Buffett would say this as one of the most successful money managers of all time.
RE: Buffett advising Kerry, according to the biography I read, Buffett was a pretty loyal Republican until he and his late ex-wife became very involved in the pro-choice debate.
posted by b_thinky at 10:50 AM on March 9, 2006
It's been mentioned here before, but the one of the best forums for good commonsense investment advice with an emphasis on widespread diversification and eliminating the "helpers" is the Vanguard Diehard's Forum. If you hope to have two nickels to rub together in your old age, check it out.
posted by mono blanco at 7:10 PM on March 9, 2006
posted by mono blanco at 7:10 PM on March 9, 2006
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posted by monju_bosatsu at 6:34 AM on March 9, 2006