<<– Continued from Part 1 (Where’s Waldo? The illusion of superior professional mutual fund manager performance.)
Instead of highlighting dozens or even hundreds of perennially superior mutual fund money managers, the media conversation has become a repetitive chant about Warren Buffett.
While highly successful and very worthy of respect, it is interesting that the “Sage of Omaha” gets so much press as a successful money manager. Warren Buffett is not a traditional money manager, because he tends not to buy small positions across a large number of securities like those that a mutual fund portfolio manager does. Instead, he often buys significant minority and controlling interests in firms and directly influences their management and thus the outcome. While managers of open investment fund take in investor deposits continuously, it has been a very very long time since Berkshire Hathaway Inc. has tapped the public markets for equity capital!
Concerning Mr. Buffett’s Berkshire Hathaway conglomerate, you may find some studies of its equity holdings, as if it were managed as an entirely independent equity mutual fund. Yes, the numbers do seem to indicate that Warren Buffett and his key lieutenants have demonstrated superior stock picking skill over time. Warren Buffett has generated so much cash over the long-term that he could not just keep it all in cash under the Berkshire mattress.
Back in 2005, The Skilled Investor took an overall look of the enterprises and investment assets under Warren Buffett’s control. As of mid-2005, both Berkshire Hathaway’s cash positions and its equity positions were close to $50 billion each. In addition to that, it held substantial positions in bonds and wholly owned businesses. The overall percentage distributions were about 30% cash, 16% bonds, 29% publicly traded equities, and 25% in businesses owned outright. The equity portion was invested in about 30 firms with 10 accounting for more than 90% of the equity valuation.
Within the rules of law and its prospectus, which mutual fund would be allowed to play Warren Buffett’s game? The answer is none.
Shrewdly buy companies at bargain prices … fix them up and manage them for the long run … let them spin off barrels of cash … invest some of the cash in equities and bonds … buy more companies and fix them up … hold on to a huge amount of cash under the mattress for very long periods because bargains are cyclical and sometimes impossible to find … keep repeating the cycle…
What mutual fund could sit on as much cash as it had in equities waiting for an opportunity to buy another firm outright? They simply would not legally be allowed to do so. And, if they sat on huge cash positions, shareholders would hammer them for not deploying their money, deviating from the benchmark index, etc. Warren Buffett’s game only works when the whole picture is taken into account — successful acquisitions, majority control, investing some of the cash flow in marketable securities, keeping a large amount of dry powder (cash) for when the opportunity arises, etc. These are not the tools available to a mutual fund portfolio manager.
So, where are all the other perennially superior traditional money managers who can be hired economically to manage your money and that of thousands of others for a superior return? They are not to be found. Individual investors spend an excessive amount of time and money looking for investment mutual fund managers who will all turn out NOT to be the next Warren Buffett in the long run. Mutual fund managers simply are not allowed to play his game.
For some ideas on how individual investors might approach the investment fund selection decision more efficiently, see this category of articles on The Skilled Investor website: Selecting Investment Funds – Mutual Funds and ETFs. Also, see the articles in this category: Rating Services – Morningstar.
Individual investors chase past superior mutual fund performance in the futile hope that past investment fund performance will predict superior future mutual fund performance.
This strategy is just a mirage, but the mutual fund industry willingly reinforces it. If a mutual fund family opens and promotes enough funds, random portfolio fluctuations will allow almost any fund family to brag selectively about only those of their funds that were past winners. Simultaneously, they quietly ignore their laggard funds. After investors repeatedly search the crowd for Waldo, after they have put their money into past winners, and after time has passed, only then do a few of these investors realize that Waldo was never there to found in the first place. (See: Can you really beat the securities markets?)
Given this bleak assessment of the chances of finding affordable, risk-adjusted, and sustained mutual fund money manager performance, The Skilled Investor has concluded that all forms of active management that cannot be cost justified should be mercilessly driven out of individual investors’ investment strategies.
Individuals first need to decide on investment strategies that are risk preference appropriate. Then, they need to choose very low-cost and very low-tax investments that they can let run over time. Maintenance should always be very minimal and very low-cost, and the urge to chase performance mirages should be heavily restrained. It is just a fool’s waste of money and time.
Tags: sage of omaha
Personal Financial Planning
- The Most Important Determinants of Your Lifetime Wealth (
Your personal earnings, expenditures, and savings are the most important determinants of your family’s long-term financial wealth
Summary: How much you earn, spend, and save are by far the most dominant determinants of your long-term financial well-being. Self-control in your decision-making regarding consumption is far more important than clever investing. Expenditure control works, while attempts [...])
- Avoiding Financial Advisor Frauds and Scams – Part 1 (
Part 1 of the The Never-Do List - 22 Good Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams
This article discusses things that you should “never do” with a financial planner or investment advisor, and it covers adviser selection, contracts, signatures, and ownership title of your assets.
You should never do certain things with [...])
- A Financial Decision Tool That Becomes Increasingly Valuable Over Time (As a financial decision tool, VeriPlan becomes increasingly valuable with the passage of time
Summary: While VeriPlan is an genuine bargain because of its low cost, it is an even greater bargain, when you consider that VeriPlan has no built-in obsolescence and that it can be used productively for years. We have engineered VeriPlan, so that [...])
- Reduce investment expenses and control taxation – Step 7 of 10 Financial Planning Steps in the Right Direction (CLICK HERE TO READ THE SKILLED INVESTOR's OTHER ARTICLES ABOUT THESE "10 FINANCIAL PLANNING STEPS IN THE RIGHT DIRECTION
Even with optimal investment strategies, there is still substantial room to improve upon net investment performance through continued and vigilant focus on controlling investment costs and tax realization.
The fees extracted by the financial securities industry increased substantially [...])
- How Many Mutual Funds are Needed for a Well-Diversified Portfolio? – Evidence (Actively-managed mutual funds are not created equally. Performance can vary significantly - even when funds pursue similar strategies or "styles."
This article addresses the impact on portfolio diversification of holding more than one actively-managed mutual fund. (For the companion article to this, see: How many mutual funds are needed for a well-diversified portfolio? – a commentary)
- Can you really beat the stock market? (
You are not likely to beat the stock market, despite all the cheer leading from the securities industry and the financial media.
When you try to beat the public securities markets, unfortunately you are more likely to trail the market’s return, because of extra costs, taxes, and investment mistakes.
The idea that investors can beat the market [...])
- I Write to the President of CitiBank Customer Service (PIRATES OF THE CREDIT SEA -- Part 5: I write to the President of CitiBank Customer Service
My saga to recover my credit card treasure continues. Previous articles have covered the particulars of my situation, and I will not repeat them.
In summary, for fifteen years I have always done my best to conform to my AT&T [...])
- Lifetime Investment Assets of Renters with Reduced Investment Costs (Lifetime investment assets of renters through investment cost improvements
Improving on Fran and Fred's lifetime financial plan through lower investment costs
Fran and Fred Frugal, both age 30, are a married working couple with $100,000 in combined annual earned income. They want to understand how valuable different personal finance strategies could be to their lifetime finances and [...])
- Part 3 of the Never-Do List – What Not to Do with a Financial Advisor (
Part 3 of the The Never-Do List - 22 Good Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams
This article discusses things that you should "never do" with a financial planner or investment advisor, and it covers unsolicited advice, sales pressure, and account decision-making discretion.
You should never do certain things with a financial [...])
- Hitting the Citibank Stone Wall in Polite Conversation (PIRATES OF THE CREDIT SEA - Part 4: Hitting the Citibank Stone Wall in Polite Conversation
This article continues my personal saga of trying to get Citibank to fix problems with their management of my credit card account with them.
For a summary of the overall situation, go to Part #1: My Treasure Is Taken!
For an article [...])
- 10 Personal Financial and Investment Planning Steps in the Right Direction (Increase your knowledge and accelerate your ability to take leadership in the management of your own personal finances and lifetime investing.
This ten-step personal financial planning process will help you optimize the management of your financial planning and investment management affairs over your lifetime, while greatly reducing the unnecessary waste of your money and your time.
- American Funds – Income Fund of America – Class A Shares (AMECX) rate a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- American Funds – Capital Income Builder Fund – Class A Shares (CAIBX) attain a +4 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Commentary on How Many Mutual Funds are Needed for a Well-Diversified Portfolio (
For holding periods of many years, diversification improves dramatically, when you hold multiple actively-managed mutual funds in an investment portfolio.
In "How Many Mutual Funds Constitute a Diversified Mutual Fund Portfolio?," Professor Edward O'Neal of the University of New Hampshire at Durham tackled the important question of how much an investor could improve on diversification by [...])
- Nationwide S&P 500 Index Fund – Class A Shares (GRMAX) fetch a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])