Anyone who’s talked to me about non-investment topics for more than ten minutes probably knows that I’m an ice skater. If you haven’t yet heard about my inner Tonya Harding, let me cut to the FAQ. Yes, I can skate backward. Yes, I can do those “spin thingies.” No, I cannot land a triple axel.
Mostly, I skate for exercise and a big dose of Zen. The miraculous thing about figure skating is that if you think about anything other than what you’re doing on the ice — at least at my skill level — you’re fairly likely to die. Lately, I’ve also been working slavishly on jumps, spins, and footwork for a test at the direction of my new coach, a very talented teacher with the work ethic of Attila the Hun(ney). My skating is improving dramatically, but there are days when it honestly hurts to sit.
During a recent practice session, a stranger waved me over to the side of the rink. “Hey!” she said. “Your pacing on the end pattern of that step sequence is off. Do you want me to help you work on it?” Reeling from the (unsolicited) feedback, I asked about her skating cred. “Oh,” she said, “I’ve been working on these too. I don’t know when I’ll be able to pass the test, though.”
It was a classic case of “do as I say, not as I do.” I filed all of her helpful tips away in my mental Iron Mountain bin and returned to my diligent practice and my coach’s notes. I probably wouldn’t have given the episode another thought had it not been for the deluge of articles that hit my inbox later that week, all extolling the latest investing wisdom of the Oracle of Omaha, Warren Buffett.
In his 2016 letter, Buffett summed up his investing mantra as follows: “The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” And the media pounced. Articles spread like sequins on a skating dress all across the Internet, each extolling the Oracle’s advice and pointing to the best exchange-traded funds for execution.
Was this yet another case of “do as I say, not as I do”? What about the decades of Berkshire Hathaway letters that demonstrated the practically patented Buffett method? What about the fact that Buffett is a buy-and-hold stock picker who favors a concentrated portfolio? What about the fact that he also pays at least two portfolio managers, Todd Combs and Ted Weschler, to manage large portions of Berkshire’s investing portfolio? Oh, and he works with at least one private equity firm (3G), and such firms are generally not known for their low-fee offerings. How does all this jibe with Buffett’s recent highly publicized advice?
There are two ways to interpret Buffett’s counsel. The first is to assume that Buffett simply believes he is the BEST (period) MONEY MANAGER (period) EVER (period) and that no one can possibly match his investing acumen. Certainly more than one investor I know has gotten his or her knickers in a twist over that particular interpretation. I may have had to skate an extra lap or two myself after my first read.
The second explanation for Buffett’s out-of-investing-character advice is a bit more nuanced and requires examining the entire letter, and perhaps even doing some extra homework. If you’ll allow me a little novice coaching, I’ll sum it up.
Buffett writes: “There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches.” Indeed, outperformance is not unheard of in mutual funds — at least 60 mutual funds outperformed the 2016 Berkshire Hathaway (BH) return, eight by more than 10 percentage points — or in hedge funds, where the top 20 funds each doubled, quadrupled, or even sextupled BH’s gains. Buffett notes that it’s not impossible to successfully manage money, but identifying talent can be extremely difficult.
He goes on to state that “huge sums act as an anchor on investment performance.” Well, that’s a tricky one — 19 percent of hedge funds control a whopping 91 percent of industry assets under management. Perhaps it makes sense, then, for investors to look at smaller funds, invest earlier in a fund’s life cycle, and establish realistic hard-close targets or asset redemption triggers to preserve performance?
Then there are investment managers Combs and Weschler, both glowingly highlighted in the 2016 letter. After beating the market, and Buffett’s returns, in 2012 and 2013, both underperformed in 2014. Interestingly, neither was terminated for poor short-term performance.
And, naturally, Buffett rails against fees, particularly the layering of fees exhibited through funds of hedge funds or other “helper” entities. But at the end of the day, he concedes, “. . . we have paid substantial sums for over-performance to our two in-house investment managers — and we hope to make even larger payments to them in the future.”
So Buffett actually seems to have more than one lesson for investors. Manager selection matters, and it’s hard. Don’t hesitate to pay for outperformance. Investigate investing talent before assets balloon. Invest for the long haul. And if you can’t or won’t do those things, then keep investments simple and cheap. Now that’s investing advice I, and apparently Warren Buffett, will take and share any day. Now if he could just help me with my triple axel . . .
