Money for Nothing
from notes of Berkshire Hathaway Meeting
Question: What do you think of business schools, and what advice would you give the new generation of "helpers" who want to follow in Buffett's footsteps?
CM: There are certainly a lot more helpers. What should you do to be like Warren Buffett? The best thing you can do ... is reduce your expectations. [Laughter]
WB: If your wife is going to have a baby, it is better to call an obstetrician than [delivering] it yourself. If your pipes are clogged, it is better to call a plumber. Most professionals have value added to them over what the laymen can do themselves. In investments, you do not have that in aggregate, despite $140 billion in total annual compensation, and it does the same thing that one person could do if he spent 10 minutes per year thinking about his investments. It's hard to think of another business like that. Can you, Charlie?
CM: I can't think of any.
WB: And it has become a bigger and bigger business. And it is unique in that the more you charge, the more money you bring in. It is useful to be in a business like that. When I speak to students, I ask them to name a business like that. One great answer is running a business school, because the amount you charge is a sign of prestige. No one wants to go to the business school that charges $20,000 in tuition, but if the school charges $40,000, more do.
In the investment field, you now have large portions of investment managers who charge fees that, in aggregate, cannot work out for investors. Obviously, some do, but you ... pay the manager 20% of the profits if they make money, and if they don't, they just close up and reopen later. If you charge this in an economy that's only growing a few percent a year, the math doesn't work. The question for you is how to pick out the exceptions, but everyone who calls on you says they are the exception. I will bet you that if you name any 10 partnerships with more than $500 million in assets and put them up against the S&P 500, they will trail the S&P, after fees, over time. Then again, I've identified good managers before the fact.
In 1969, when I closed my partnership, I recommended my investors go with [Sequoia Fund's] Bill Ruane and [First Manhattan's] Sandy Gottesman. If you know enough about the person and how they've done in the past, you can occasionally find someone. But if you're running a big pension fund, with everyone calling on you, you will likely invest in the best salespeople.
CM: I think it ought to be a crime to entertain a state pension fund manager, and it should be a crime for that person to accept [one]. Watching these managers go after the business is not a pretty site. The whole concept of the house advantage is an interesting one in modern money management. The terms of the managers of the private partnerships look a lot like the take of the croupier at Monte Carlo, only greater.
WB: Is there anyone we've forgotten to offend?
Question: What do you think of business schools, and what advice would you give the new generation of "helpers" who want to follow in Buffett's footsteps?
CM: There are certainly a lot more helpers. What should you do to be like Warren Buffett? The best thing you can do ... is reduce your expectations. [Laughter]
WB: If your wife is going to have a baby, it is better to call an obstetrician than [delivering] it yourself. If your pipes are clogged, it is better to call a plumber. Most professionals have value added to them over what the laymen can do themselves. In investments, you do not have that in aggregate, despite $140 billion in total annual compensation, and it does the same thing that one person could do if he spent 10 minutes per year thinking about his investments. It's hard to think of another business like that. Can you, Charlie?
CM: I can't think of any.
WB: And it has become a bigger and bigger business. And it is unique in that the more you charge, the more money you bring in. It is useful to be in a business like that. When I speak to students, I ask them to name a business like that. One great answer is running a business school, because the amount you charge is a sign of prestige. No one wants to go to the business school that charges $20,000 in tuition, but if the school charges $40,000, more do.
In the investment field, you now have large portions of investment managers who charge fees that, in aggregate, cannot work out for investors. Obviously, some do, but you ... pay the manager 20% of the profits if they make money, and if they don't, they just close up and reopen later. If you charge this in an economy that's only growing a few percent a year, the math doesn't work. The question for you is how to pick out the exceptions, but everyone who calls on you says they are the exception. I will bet you that if you name any 10 partnerships with more than $500 million in assets and put them up against the S&P 500, they will trail the S&P, after fees, over time. Then again, I've identified good managers before the fact.
In 1969, when I closed my partnership, I recommended my investors go with [Sequoia Fund's] Bill Ruane and [First Manhattan's] Sandy Gottesman. If you know enough about the person and how they've done in the past, you can occasionally find someone. But if you're running a big pension fund, with everyone calling on you, you will likely invest in the best salespeople.
CM: I think it ought to be a crime to entertain a state pension fund manager, and it should be a crime for that person to accept [one]. Watching these managers go after the business is not a pretty site. The whole concept of the house advantage is an interesting one in modern money management. The terms of the managers of the private partnerships look a lot like the take of the croupier at Monte Carlo, only greater.
WB: Is there anyone we've forgotten to offend?
