Warren Buffet’s take on investment ‘helpers’ | VailDaily.com
YOUR AD HERE »

Warren Buffet’s take on investment ‘helpers’

Richard Loth

Warren Buffet’s annual letter to the shareholders of Berkshire Hathaway was posted on the company’s Web site last week prior to this week’s delivery of its annual report. Both events have become a yearly ritual high up on the interest scale of thousands of Buffet’s investing fans. As usual, he didn’t disappoint us.For this week’s column, I’ve chosen a small portion of his words of wisdom to share with you. On several occasions, I’ve written and commented on the sins of certain “investment advice-givers” (my term), but Mr. Buffet’s take on “how to minimize investment returns” is a real gem on this topic. Because of space limitations, I’m taking some editorial license with his presentation. I accept responsibility for any serious errors of omission in this, my condensed, excerpted version of his original words on the subject:A few fast-talking Helpers approach the wealthy Gotrocks family and persuade it to sign them on as investment advisers. The Helpers – for a fee, of course – obligingly agree to handle their transactions. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers.After a while, the Gotrocks realize that they are not doing so well. Enter another set of Helpers with a suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades, and, overall, a bigger slice of the pie now goes to the two classes of Helpers. The family’s finances don’t improve. The solution? More help, of course.It arrives in the form of financial planners and institutional consultants to advise the Gotrocks on selecting manager-Helpers. The family is now supporting three classes of expensive Helpers. Things go from bad to worse, when a fourth group called hyper-Helpers arrive and explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers are not sufficiently motivated.The new arrivals offer a breathtakingly simple solution: Pay more money. The hyper-Helpers convince the family that they have magical powers similar to those acquired by Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family pays up.Today, a record portion of the earnings that would go in their entirety to owners is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave the Gotrocks with all the losses – and large fixed fees – when the Helpers are dumb or unlucky (or occasionally crooked).A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20 % of the earnings. In other words, the burden of paying Helpers may cause equity investors, overall, to earn only 80% or so of what they would earn if they had just sat still and listened to no one.If any of this sounds like what’s going on in the world of hedge funds and private equity deals, you’ve made the right connection. While, generally speaking, these investment vehicles are meant to be driven by the rich and famous, some clever Wall Street types see an opportunity to tempt mainstream investors into also taking a drive in the fast lane. I would strongly suggest that individuals interested in investing, continuously remind themselves of three basic investment principles: risk and return are commensurate; be a patient, long-term investor; and understand what you own.The Investing Wisely column is written by Richard Loth, Managing Principal of Mentor Investing, an independent Registered Investment Adviser. Mr. Loth can be reached by emailing to mentor@centurytel.net or calling (970) 328-5591.Vail, Colorado


Support Local Journalism