Warren Buffet

I never cease to marvel at the simple brilliance of Warren Buffet. Often, the brilliance lies in the simplicity - in the Sage’s phenomenal ability turn complex situations into fundamental truths. Here’s the latest:

In the century to end-1999, American equities grew by 5.3% per annum. That modest sounding figure took the Dow Jones index from 66 to 11,479 - a fantastic rise. But if you’re hoping for a repeat in the current century, forget it! Buffet comes to this sobering conclusion from another fundamental truth: the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn.

Writing to his shareholders, Buffet points out that, while individual owners can out-do other owners, ‘There is simply no magic that will enable them to extract wealth from their companies beyond that created by the companies themselves’.
In fact, owners will do slightly less well than the businesses in which they invest. That’s because of ‘frictional costs of investing’, meaning commissions, etc.

Buffet’s point is that these voluntary deductions have grown colossally. That’s due to the proliferation and rising greed of types he calls ‘Helpers’. The first line of helpers are the brokers, who benefit every time a customer switches stocks - in stark opposition to Buffet’s preferred course, which is to hold them for as long as possible, preferably for ever.

After the brokers come the managers, who take fees for managing your portfolio, so that a still bigger ’slice of the pie’ is taken from the investors. The latter, in the effort to maintain their pie, may well try (and pay) a third bunch of helpers - financial planners and institutional consultants, who pick the manager helpers on behalf of their clients.

The latter collectively are now doing worse than ever, which makes them ripe for the assistance of the ‘Hyper-Helpers’. These point out (which is easy enough) that the brokers, managers and consultants aren’t delivering because they’re not motivated enough. But more observant investors may ’see that some of the hyper-helpers are really just manager helpers who wear new uniforms, bearing sewn-on sexy names, like HEDGE FUND or PRIVATE EQUITY’.

Buffet saves his greatest sarcasm for ‘the recent pandemic of profit arrangements, under which helpers receive large portions of the winnings when they are smart or lucky, and leave [investors] with all the losses - and large fixed fees to boot - when the helpers are dumb or unlucky (or occasionally crooked)’.

These words of wisdom struck a particular resonance in my mind because I had been reading an account of the failure of Carl Ichan to raid the media giant Time Warner. Icahn was a famous (or infamous) corporate raider whose investors have made some whacking profits down the years. He charges a satisfactory management fee and takes a quarter of any profits. So said investors are paying heavily for the privilege of having him as their Helper. Maybe they’d do better just to copy the biggest holdings of Berkshire Hathaway, which, of course, Buffet’s baby.

Interestingly, he didn’t invest in Wal-Mart until last year. His 0.5% of the retail colossus cost $944 million - and is now worth $933 million. Which only supports his point that investing is getting tougher. The Dow will have to hit 2,011,011.23 by December 31 2099 to match the previous century’s record. But it’s made a bad start - after six years into the new century, the Dow, like Buffet’s investment in Wal-Mart, hasn’t gained a cent.