The Neverending Search for Value

For this month’s “Notes” we once again return to the heartland of Omaha, Nebraska, home of Mr. Warren Buffet.  We wanted to focus on a specific statement that Warren made when he was addressing his shareholders in his annual letter to shareholders.  This letter typically arrives a few weeks prior to the actual shareholder meeting in Omaha and serves as a guide for many of the questions.  This letter is usually scrutinized by public and press alike and often makes headlines.  This year’s letter was no exception.

In this year’s letter, Buffet argued that all investors, no matter their size, should invest in index funds.  This is commonly referred to as “passive investing”, because index funds do not try to outperform the index through stock-picking or any other investment approach, but “passively” hold the index.  This is significant in that Buffet and all the long-time Berkshire Hathaway investors made their fortune not from passive investing but from active investing.  This appears to be a major shift in Buffet’s investment philosophy.  As you might imagine, his advice was broadly covered by the financial media and used to villainize most financial professionals, to whom he referred as “Wall Streeters”. His basic assumption is that financial professionals almost guarantee “poor investment performance accompanied by high fees.”

During the annual meeting, Warren was asked to give some color to his statements about “Wall Streeters” and passive index investing.   As Buffet began to explain, it became quickly evident that the basis for the comments were his family’s unique situation: his family has more money than it could spend over multiple generations, giving his family an infinite time horizon and an ability to ride through stock-market ups and downs with ease.  This is not the case for most families.

Most families need their savings to enhance their retirement income and are afraid of outliving their money.  Unlike the Buffets, typical families face several basic limitations, among them: 1) the size of their investment portfolio, 2) their expected lifespan, and 3) their ability or desire to bear risk—all of which impact the “income” they can sustainably withdraw from their savings.  These limitations force them to balance competing objectives, which often include their desire to maximize returns, on the one hand, and their need to survive the ups and downs of their investment portfolio, on the other.  Most of us are very mindful of the impact a significant market downturn can have on our lifestyle.  That’s why many people turn to financial professionals for advice.

Unlike the typical family, the Buffets are able to ignore the limitations faced by others. With an income from their investment portfolio that far exceeds their lifestyle, they can afford to ignore the risk of an equity market crash, because it won’t impact their lifestyle or that of their heirs.  With this in mind, we understand why the solution, according to Mr. Buffet, is to buy a stock market index and never worry about the portfolio again.  Because he literally doesn’t have to.

And despite his apparent disdain for financial professionals, he has served as his family’s financial advisor, overseeing not only investment management, but also the planning of wealth transfer, philanthropic giving, tax minimization, etc., around the central issue of “what is the money for,” and we are certain he did so with the help of attorneys and accountants. For a normal family with financial limitations and competing objectives, this role would be filled by its trusted financial advisor.

Wouldn’t this make the case for Warren Buffet to encourage every family to identify and work with an advisor they trust to assist them in establishing and implementing a plan around the important question of “what is the money for”?  We believe so.

When Buffet was asked if he would have paid a management fee for the advice of his business partner, Charlie Munger, Buffet replied that he would gladly pays fees when they deliver such value as Charlie.  So, there are obviously situations that would warrant paying fees, and there is value that can be gained from paying for expert advice.  Here’s to our belief that Charlie, who is 93, is not the last financial professional who is worth paying for his advice.