March 3, 2008
Beware the Glib Helper
From this year’s Letter to Shareholders (PDF), written by Warren Buffett:
“Naturally, everyone expects to be above average. And those helpers – bless their hearts – will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be below average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group – the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the ‘know-nothings’ – must win.
I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about doubledigit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: ‘Why, sometimes I’ve believed as many as six impossible things before breakfast.’ Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”
As always, the whole Letter bears very close reading (it’s only 22 pages of Plain English).
Aside: Do any other language nerds have a problem with Buffett writing “yearend” and “doubledigit” as single words?
March 3rd, 2008 at 6:53 pm
Im planning on buying a share in Berkshire so I can meet Buffett - its true! People who travel to the AGM from outside the US, he meets personally during the weekend at a special gathering of offshore investors who have travelled far. At least it says that in the 06 letter - havent checked 07 yet.
March 3rd, 2008 at 7:53 pm
Rod: Yes, he will meet the “ferners” at a special meeting this year too.
March 3rd, 2008 at 11:20 pm
That maths and logic seem to make sense. Thus those of us who are the followers of the ‘box idea’ must believe that we are the above average guys among the active investors!
March 4th, 2008 at 3:36 am
Buffet once bought one of the helpers. No wonder the employees at solomon bro didn’t especially like him. lol
He has compounded his money at 21%/yr since ‘65 and now is saying (in so many words) that only fools expect to beat the averages.lol
March 4th, 2008 at 10:31 am
@Sean: You don’t want to confuse patient, long-term investing with hyperactive short-term trading. :)
@yo: He’s modestly saying there ain’t many other Buffetts out there.
March 4th, 2008 at 1:35 pm
Sean what makes you think the “box” isn’t a helper? Does it’s historical record prove otherwise?
March 4th, 2008 at 4:06 pm
yang: Although the Box’s historical record is very short, at least it’s available and completely transparent. Is that true of the other “helpers” out there?
March 4th, 2008 at 11:31 pm
the box is a helper or is not, i don’t know. but i always keep an open mind. you can call ltcm a helper since they went bust. but jwm is doing quite well since and i still think they have an edge. to distinguish skill from luck is just sth i can never master.
March 5th, 2008 at 4:40 am
Sean: The long test of time usually separates the skillful from the lucky.
March 5th, 2008 at 7:29 am
I take back what I said about JWM. Just heard on the street that they lost huge on the munis in the last couple of days. So did a few other big fixed income arb guys. The magnitude is as high as 25% for some!