Monday, March 20, 2006

 

The Wisdom of Buffett

Uh, that'd be Warren, not Jimmy. The genius investor speaks out on the danger of "professional" account management and excessive trading:

And that's where we are today: A record portion of the earnings that would go in their entirety to owners -- if they all just stayed in their rocking chairs -- 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 family members with all the losses -- and large fixed fees to boot -- when the Helpers are dumb or unlucky (or occasionally crooked).

[SNIP]

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, "I can calculate the movement of the stars, but not the madness of men." If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the fourth law of motion: For investors as a whole, returns decrease as motion increases.

Interestingly enough, my employer has been sending out polite invitations to sign up for a new 401(k) account management service. I finally got around to looking over the paperwork, and quickly shit-canned it when I found that the service came at the price of 0.6% of the fund's value each year. WTF? At a 10% rate-of-return, that would eat up over 1/20th of my yearly gains (we haven't seen 10% average annual returns in the time that I've been investing, so the actual impact would be much worse).

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