Investment guru laments culture of trading to generate fees and fast profit
Published on Dec 08, 2012, The Straits Times
By andrew ross sorkin
"IF SOMEBODY bought Berkshire Hathaway in 1965 and they held it, they made a great investment - and their broker would have starved to death."
Mr Warren Buffett was having lunch with me at a private club in New York last week, lamenting the state of a Wall Street that promotes a trading culture over an investing culture and offers incentives for brokers and traders to generate fees and fast profit.
"The emphasis on trading has increased. Just look at the turnover in all of the stocks," he said, adding with a smile: "Sales people have forever gotten paid by selling people something. Generally, you pay a doctor for how often he gets you to change prescriptions."
Mr Buffett, 82, is famous for investing in companies that he sees as solid operations and essential to the economy, like railroads, utilities and financial companies, and holds his stakes for the long run. The argument that the markets are better off today because of the enormous amount of liquidity in the stock market, a function of quick flipping and electronic trading, is a fallacy, he said.
"You can't buy 10 per cent of the farmland in Nebraska in three years if you set out to do it." Yet, he pointed out, he was able to buy the equivalent of 10 per cent of IBM in six to eight months as a result of the market's liquidity.
"The idea that people look at their holdings in such a way that that kind of volume exists means that, to a great extent, it's a casino game." Of course, unlike many investors, he plans to hold his stake in IBM for years.
Mr Buffett was in a reminiscing mood about a bygone era, in part because he was in New York to make the rounds on television to discuss a new book chronicling his 61-year career, which began in 1951 at Buffett-Falk & Co in Omaha. (The book Tap Dancing To Work by long-time journalist Carol Loomis of Fortune magazine, is a compendium of articles that she and others wrote in Fortune that creates a series of narratives spanning the arc of his career.)
Ms Loomis, who met Mr Buffett in 1967, came to our lunch. She may know more about Mr Buffett than he knows about himself.
As we talked about the "good old days", it became clear that he was less enamoured of the investor class of the next generation.
When I asked, for example, if there were any private equity investors that he admired, he flatly replied: "No." When I asked if he followed any hedge fund managers, he struggled to name any, before saying that he liked Mr Seth Klarman, a low-key value investor who runs the Baupost Group, based in Boston.
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"That was not the case earlier on; you really had to have some performance for some time before people would put money with you. It's a marketing thing."
He paused, and then posited that if he started a hedge fund today, "I'd probably grow faster, because a record now would attract money a lot faster", speculating that his record of returns would attract billions of dollars from pension funds and others.
But he then acknowledged a truism of investing that he knows all too well, as the manager of an enterprise that is now worth some US$220 billion (S$268 billion): "Then money starts getting self-defeating at a point, too."
Until 1969, Mr Buffett operated a private partnership that was akin in some ways to a modern hedge fund, except the fee structure was decidedly different.
Instead of charging "2 and 20" - a 2 per cent management fee and 20 per cent of profits - his investors "keep all of the annual gains up to 6 per cent; above that level Buffett takes a one-quarter cut", Ms Loomis wrote. However, in 1969, he announced he would shutter his partnership. "This is a market I don't understand," he said, according to Ms Loomis.
He believed that the stock market of 1968 had become wildly overpriced - and he was right. By the end of 1974, the market took a tumble. Instead, he remained the chief executive of Berkshire Hathaway, one of his early investments.
"If you want to make a lot of money and you own a hedge fund or a private equity fund, there's nothing like 2 and 20 and a lot of leverage," he said at lunch. "If I kept my partnership and owned Berkshire through that, I would have made even more money."
Mr Buffett says he now considers himself as much a business manager as an investor. "The main thing I'm doing is trying to build a business, and now we built one. Investing is part of it but it is not the main thing."
Today, Mr Buffett is particularly circumspect about the investment strategies that hedge funds employ, like shorting, or betting against, a company's stock. He used to short companies as part of a hedging strategy when he ran his partnership, but now he says that he and Mr Charlie Munger, his long-time friend and vice- chairman of Berkshire, see it as too hard.
One of his big worries these days is about what's going to happen to all the pension money that is being invested in the markets, often with little success, in part because investors are constantly buying and selling securities on the advice of brokers and advisers, rather than holding them for the long term.
"Most institutional investors, whoever is in charge - whether it's the college treasurer or the trustees of the pension fund of some state - they're buying what they're sold."
Most pension funds probably didn't buy Berkshire in 1965 and hold it, but if they had, they would have far fewer problems today.
At the end of her book, Ms Loomis says when she mentioned Mr Buffett's name for the first time in Fortune magazine in 1966 - accidentally spelling Buffett with only one "t" - Berkshire was trading at US$22 a share. Today it is almost US$133,000 a share.
THE NEW YORK TIMES
