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When Mr. Buffett speaks, we all should listen. March 5, 2008

Posted by shaferfinancial in Uncategorized.
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The most successful investor over the last 45 years has been a man by the name of Warren Buffett.  The fact is no one has come close to his record.  So when he speaks we should all listen.  The latest annual report for his company, Berkshire Hathaway, Inc. is out and as usual Mr. Buffett delivers pearls of wisdom in it.

First, lets look at his record.  Since 1965, when he bought the vehicle that is now Berkshire Hathaway, the average book value annual rate of return is 21.1%.  Since 1965 that means his total return is 400,863%!  Compare that to the S&P 500, which has an average return including dividends of 10.3% in that time period.  The S&P’s total return is 6,840%.

But some people have suggested the old man has lost his touch recently.  So let’s look at the last 10 years, a time period I have personally owned his stock.  If you would have invested $1,000 in Berkshire Hathaway ten years ago it would be worth $3,062.08 today.  If you could have invested in the S&P 500 10 years ago with $1,000 it would be worth $1,554.40 today. So you would have twice as much money investing with Mr. Buffett as you would have investing in the S &P 500 stock index.  Of course to invest in the stock index you would have to invest in a index mutual fund and pay its expenses.  Now the lowest expenses run at least .5%, but the majority run much more than that, as much as 4% (average is 2.5%).

Now, tell me again why the financial planning industry almost universally suggests investing in stock market indexed mutual funds?  Or even worse, investing in actively managed stock mutual funds, which on the whole get a worse return?

Go on listening to the advice of the financial planning industry, go on following the herd!!!!

But, I digress.

What did Mr. Buffett feel is important to talk about?  Well, one thing is the pension situation.  He suggests that the rate of return 363 out of the 500 largest companies that have pension plans in the US assume for their pension plans is unattainable.  We will talk about that assumption in a second, but first what does this mean?  It means, that future pension demands will outstrip what the companies have put away for the pensions, therefore reducing their worth in the future.  Are they planning to go to the bankruptcy courts to shed these pension plans?  Several large companies have already done this.

Here is his direct language:  (By helpers he means money managers and financial planners)

“I should mention that people who expect to earn 10% annually from equities during this century – envisioning that 2% of that will come from dividends and 8% from price appreciation – are implicitly forecasting a level of about 24,000,000 on the Dow by 2100. If your adviser talks to you about doubledigit returns from equities, explain this math to him – not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland, who said: “Why, sometimes I’ve believed as many as six impossible things before breakfast.” Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.”

What is the average assumption for these pension plans?  8%!  The average pension plan carries 72% of its assets in equities, so the equity section of each plan must get almost 10% return after fee’s are paid out.  Fee’s he points out that are “far higher than they have ever been.”

Here is another direct quote on investor returns:

“Naturally, everyone expects to be above average. And those helpers – bless their hearts – will certainly encourage their clients in this belief. But, as a class, the helper-aided group must be average. The reason is simple: 1) Investors, overall, will necessarily earn an average return, minus costs they incur; 2) Passive and index investors, through their very inactivity, will earn that average minus costs that are very low; 3) With that group earning average returns, so must the remaining group – the active investors. But this group will incur high transaction, management, and advisory costs. Therefore, the active investors will have their returns diminished by a far greater percentage than will their inactive brethren. That means that the passive group – the “know-nothings” – must win.”

No wonder those “helpers” don’t want you to invest in Berkshire Hathaway, if these words are in the annual report!!!

There is much more in the annual report worth reading.  A quick google search should find it.

I think I am going  to invest some more in Mr. Buffett!

***Nothing in this blog, or in this post, should be considered “investment advice.”  It is only the ramblings of the author, whom should be considered a mad man at best***

Picture of Mr. Buffett Below


1. Jason Elder - March 5, 2008

I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.

– Jason.

2. shaferfinancial - March 6, 2008

Thanks, Jason. I will try not to dissapoint.

3. Jeff Brown - March 6, 2008

David — Thanks for the support! 🙂 Every time I say something on this general subject, often quoting Mr. Buffet, a storm is created by those whose bull has been gored.

Empirical evidence wins the day every time it’s tried. Great stuff.

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