My closest connection to Warren Buffett is through a friend of mine who works for BNSF and once spent a day riding on a train with the billionaire sampling dishes for a new dining car menu. I am not a Berkshire Hathaway investor. I have never previously read any of Buffett’s annual letters. But I was intrigued on Tuesday by a New York Times article that quoted an allegation leveled by Buffett: he said that recent failures by money managers who charge exorbitant fees—yet often underperform the stock market—are responsible for much of the financial damage suffered by public employee pension funds. Considering the fact that the Dallas Police and Fire Pension just settled with its advisory firm, CDK, for around $2 million (a small chunk of the estimated $320 million in losses), I figured he was onto something.
So today, when I finally had a few spare minutes, I tracked down the letter. I learned two things: first, I need to switch to GEICO. Second, Buffett is a really good and surprisingly witty writer. I enjoyed his appropriate use of italics for emphasis. And the repeated GEICO jokes, which weren’t really jokes but an effective sales technique. There’s a reason this guy makes money.
The part of the letter quoted below is especially worth a read. Who else would use advice from a pig seller to explain the short-sighted loss of $100 billion by pension funds, endowments, and rich people over the last decade? Warren Buffett, that’s who.
The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.
In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.
Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees. The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.
Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”
Long ago, a brother-in-law of mine, Homer Rogers, was a commission agent working in the Omaha stockyards. I asked him how he induced a farmer or rancher to hire him to handle the sale of their hogs or cattle to the buyers from the big four packers (Swift, Cudahy, Wilson and Armour). After all, hogs were hogs and the buyers were experts who knew to the penny how much any animal was worth. How then, I asked Homer, could any sales agent get a better result than any other?
Homer gave me a pitying look and said: “Warren, it’s not how you sell ‘em, it’s how you tell ‘em.” What worked in the stockyards continues to work in Wall Street.