Berkshire Hathaway 2006 Annual Meeting Audience Question # 22

In aggregate, the investment profession does not have value added to them above what the laymen can accomplish themselves

Warren Buffett:

Number 7?

Audience Member:

Good morning. My name is David Saber, shareholder from Minneapolis, Minnesota. Looking for some advice you might give the young professionals here.

I could be classified as one of those helpers you describe in your annual report. In fact, most of my friends are helpers, and some could be classified as super helpers.

Most would love to step out and explore some of their more innovative ideas, innovative business models, strategies, and things of that nature.

But the risk of giving up a significant salary, health insurance, flights, other ridiculous corporate perks some of us young professionals earn.

What advice would you have for us in pursuing those dreams?

Warren Buffett:

Charlie, what do you think?

Charlie Munger:

Well, there’s certainly a lot more helpers in the economy than there used to be, and the ones that come here tend to be the very best of the helper class.

So, I don’t think you should judge the helper class by those you meet here. We get the best of them.

And as to what the young helpers ought to do so that they’ll eventually be like Warren Buffett, I would say the best thing you can do is reduce your expectations.

Warren Buffett:

I think I’ve heard that before.

Well, you know, as I wrote about… and I… trying to tweak the system a little bit… but it is an interesting business in that the activities of the professionals are self-neutralizing.

And if you’re going to… if your wife is going to have a baby… you’re going to be better off if you call an obstetrician, probably, than if you do it yourself. You know, and if your plumbing pipes are clogged or something, you’re probably better off calling a plumber.

Most professions have value added to them above what the laymen can accomplish themselves. In aggregate, the investment profession does not do that.

So you have a huge group of people making… I put the estimate as $140 billion a year… that, in aggregate, are, and can, only accomplish what somebody can do, you know, in ten minutes a year by themselves.

And it’s hard to think of another business like that, Charlie.

Charlie Munger:

I can’t think of any.

Warren Buffett:

No.

But it’s become a bigger and bigger business.

And, as I’ve pointed out in the report, the main thing that’s been learned is that the more you charge, at least temporarily, the more money you bring in, that people have this idea that price equals value.

It’s useful to get into a business like that.

Sometimes, if I’m talking to the people at a business school and I ask them what the… what a great… to name me a great business… and, of course, one of the great businesses is a business school because, basically, the more you charge, the more your prestige is, to some extent.

And people think that a business school that charges 50,000 a year tuition is going to be better than one that charges 10,000 a year of tuition.

So there’s some of that that… well, there’s a lot of that that’s gotten into the investment field recently, and you now have large… certain large… portions of investment management that are charging fees that, in aggregate, cannot work out for investors.

Now, obviously some do, you know. But you cannot be paying people 2 percent and 20 percent where they get up it in the good years, and they fold their partnerships and start another one if they have a bad year and that sort of thing.

You can’t have that coming out of an economy that’s only going to produce, we’ll say, you know, 7 percent or something like that a year for investors, and have people net better off. It isn’t going to work.

And then the question that you will have is, “How do I pick out the few exceptions?” And everyone that calls upon you to sell you this will tell you that they are an exception.

And, I am willing to bet a significant sum of money, we’ll put it up, to anybody who wants to name ten partnerships that are $500 million or more of management and pit those, after fees, against the S&P over a ten-year period.

It… you know, it gets away from the survivorship bias and all that kind of a thing. And it isn’t going to happen.

But a few will do well. They’re bound to do well.

And, actually, I think I do know how to pick a few that will do well. I mean, I did it in the past.

When I wound up my own partnership in 1969, I told people to go to either Bill Ruane or Sandy Gottesman, and that would have been a very good decision, whichever place they went.

So, if you know enough about the person, know enough how they’ve done it in the past, know enough about their personality, honesty, and a whole bunch of things, I think that occasionally you can make a very intelligent choice in picking an investment manager.

But I don’t think you can do it if you’re sitting running a pension fund in some state and you have 50 people calling on you.

You’re going to go with the ones that are the best salespeople and not the ones that are the best investors. Charlie?

Charlie Munger:

Yeah. On that state pension fund investment subject, I think it ought to be a crime to entertain, in any way, a state pension fund official, and I think it ought to be a crime, if you are a state pension fund official, to accept the entertainment.

It’s not a pretty scene, a lot of investment management, in America now. And, human nature being what it is and the amounts of money being what they are, I don’t think much is going to be improved.

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