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Buffett on CNBC


kiwing100
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Guest longinvestor

http://www.cnbc.com/id/100518304

 

This is the clip where Warren takes on the fees that ordinary investors pay others to manage their money. I've been arguing similarly on this board and my interpretation of Warren's comments are:

1) If you just want to passively invest for the long term, buy a Vanguard Market Index fund and leave it alone.

2) If you are an active, value investor, how in the heck are you going to beat a concentrated portfolio of just BRK + FFH over the long term, especially if you bought them just before and during the financial crisis.

 

People will find out after 10 years or so that the fees are just what came between them and their wealth.

 

I'm most interested in hearing what some of the folks on this board who manage money for others are thinking about this. Are you expecting to beat BRK over the long term?

 

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Yes, fees for active management - and some index-type funds - are too high, especially in Canada. I see it in my own fund. After 5 1/4 years, fund expenses have accounted for almost 25% of gross returns. After only 5 1/4 years!

 

To correct for this, I plan to lower fees as soon as is feasible (meaning, when a certain level of capital is reached) and take a straight salary thereafter; even going so far as having the fund own the management company. The impact on net returns should be huge over time. It's not original (BRK, FFH, Vanguard) even if unusual.

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http://www.stansberryresearch.com/growth-stock-wire/1289/Weekend-Edition

 

Weekend Edition

The simple difference between $400,000 and $4.8 million

Saturday, October 9, 2010

 

We often warn our readers of the impracticality of the "two and 20" most hedge funds charge their clients... That is 2% of total assets and 20% of any gains. This fee structure guarantees the fund manager gets paid regardless of performance.

 

For example, a manager with $1 billion under management earns $20 million just for walking in the door on January 1. And the 20% "kicker" encourages excessive risk.

 

A recent article in the British newspaper the Telegraph quantifies how damaging "two and 20" is to the investor using Warren Buffett's historical returns. An excerpt from the article is below:

 

As you are aware, Warren Buffett has produced a stellar investment performance over the past 45 years, compounding returns at 20.46 per cent per annum. If you had invested $1,000 in the shares of Berkshire Hathaway when Buffett began running it in 1965, by the end of 2009 your investment would have been worth $4.8m.

 

However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2 per cent of the value of the funds as an annual fee plus 20 per cent of any gains, of that $4.8m, $4.4m would belong to him as manager and only $400,000 would belong to you, the investor. And this is the result you would get if your hedge fund manager had equaled Warren Buffett's performance. Believe me, he or she won't.

 

So, $1,000 invested alongside Buffett earned you $4.8 million over the past 45 years. That same $1,000 invested with Buffett while paying "2 and 20," earns $400,000. I know the numbers seem unbelievable, but it shows you the power of compounding.

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Guest longinvestor

Yes, fees for active management - and some index-type funds - are too high, especially in Canada. I see it in my own fund. After 5 1/4 years, fund expenses have accounted for almost 25% of gross returns. After only 5 1/4 years!

 

To correct for this, I plan to lower fees as soon as is feasible (meaning, when a certain level of capital is reached) and take a straight salary thereafter; even going so far as having the fund own the management company. The impact on net returns should be huge over time. It's not original (BRK, FFH, Vanguard) even if unusual.

 

That is exemplary fidiciary responsibility on your part. And the candor of your post is remarkable.

 

When the baby boomers retire (eventually, because most won't have enough to retire on at "normal" age) the impact of the fees collected from them over their working careers (30-40+ years) thru mutual funds included in their 401k's etc, when it becomes known to the larger public will likely be the scandal of our times! John Bogle of Vanguard has been warning of this for the past 20 years. Read his book "Enough".

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Many money managers take to heart what Buffett said about generating 50% if he manages $1M:

 

http://valuevista.blogspot.com/2007/06/warren-buffett-50-returns.html

 

The fallacy here is that Buffett did NOT mean anyone can do so, did he?! :-)

 

To any members on this board, I strongly encourage you to be entrepreneurial by starting your own business because I think anyone should do it at least once in their lives regardless the outcome so that you don't regret on your death-bed one day!

 

It's synonymous to having kids where you'll experience a lot of stress, uncertainty, anxiety and sometime pain.  But the financial returns will ALWAYS be far better than having kids! LOL :-)

 

I'm most interested in knowing anyone who can inspire my kids to get into ivy-league schools without being a tiger parent: http://online.wsj.com/article/SB10001424052748704111504576059713528698754.html

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Yes, fees for active management - and some index-type funds - are too high, especially in Canada. I see it in my own fund. After 5 1/4 years, fund expenses have accounted for almost 25% of gross returns. After only 5 1/4 years!

 

To correct for this, I plan to lower fees as soon as is feasible (meaning, when a certain level of capital is reached) and take a straight salary thereafter; even going so far as having the fund own the management company. The impact on net returns should be huge over time. It's not original (BRK, FFH, Vanguard) even if unusual.

 

That is exemplary fidiciary responsibility on your part. And the candor of your post is remarkable.

 

When the baby boomers retire (eventually, because most won't have enough to retire on at "normal" age) the impact of the fees collected from them over their working careers (30-40+ years) thru mutual funds included in their 401k's etc, when it becomes known to the larger public will likely be the scandal of our times! John Bogle of Vanguard has been warning of this for the past 20 years. Read his book "Enough".

 

I have done, as well as his book Common Sense on Mutual Funds and his book Clash of the Cultures. I just can't get enough of Bogle. A real hero.

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So, $1,000 invested alongside Buffett earned you $4.8 million over the past 45 years. That same $1,000 invested with Buffett while paying "2 and 20," earns $400,000. I know the numbers seem unbelievable, but it shows you the power of compounding.

 

One good reason why I can't convince myself to pick up GLRE...

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