Berkshire Hathaway 2013 Annual Meeting Audience Question # 52

Warren and Charlie’s advice to a young money manager on how to attract investments

Warren Buffett:

OK. Station 6.

Audience Member:

Hi. Brandon from Los Angeles.

I’m in my 20s and I’m starting a partnership. What advice do you have about getting people to put in money before I have a track record as a solo investor?

Warren Buffett:

Well, you haven’t sold me.

No, I think people should be quite cautious about investing money with other people, even when they have a track record, incidentally. There are a lot of track records that don’t mean much.

But overall, I would advise any young person that wants to manage money, and wants to attract money later on, to start developing an audited track record as early as they can.

I mean, it was far from the sole reason, far from the sole reason, that we hired Todd and Ted, but we certainly looked at their record, and we looked at a record that we both believed and could understand, because we see a lot of records that we don’t really think mean much.

I mean, if you get… you know, if you have a coin flipping contest, as I wrote, you know, some years ago, and you get 310 million orangutans out there and they all flip coins and they flip them 10 times, you know, you will… instead of having 300 million left, you’ll have 300,000, roughly, left that’ll flip ten times in a row successfully.

And those orangutans will probably go around trying to attract a lot of money to back them in future coin flipping contests.

So it’s our job when we hire somebody to manage money to figure out whether they’ve been lucky coin flippers or whether they really know what they’re…

Charlie Munger:

When you had his problem, didn’t you scrape together about $100,000 from a loving family?

Warren Buffett:

Yeah. Well, I hope they kept loving me after they gave me the money. That was…

Well, it was very slow, and it should have been very slow. As Charlie has pointed out, some people thought I was running a Ponzi scheme, probably, there.

And other people may not have thought it, but it was to their advantage to sort of scare people because they were selling investments in Omaha.

But you… to attract money, you should deserve money, and you should develop a record over time that… and then you should be able to explain to people why that record is a product of sound thinking rather than simply being in tune with a trend or simply just being lucky.

Charlie? You’re starting today and you’re 25 years old. How do you attract money?

Charlie Munger:

I think most people start with friends and family, or people whose trust they’ve already earned in some other way. So it’s hard to do when you’re young, and that’s why people start so small.

Warren Buffett:

And a relatively few will be successful.

Charlie Munger:

That’s right, too.

Warren Buffett:

Some of them… a great many will be successful and make… I mean, you know, we have the hedge fund record here. And during that time, the hedge fund managers have probably made a very considerable amount of money.

As I pointed out, Todd and Ted, working under a 2 and 20 arrangement, if they put the money in a hole in the ground, would make $120 million each this year.

So it’s not exactly an arrangement that you don’t want to think about a little bit before you engage in it.

Charlie Munger:

The arithmetic attracts many of the wrong sort of people.

Warren Buffett:

Naturally, we thought we were exceptions.

Charlie Munger:

Yes.

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