Costs and Helpers (part 2)
Welcome to part two of a three-part quick-look at investment fees, ‘Helpers’ and how you can improve your own investment returns with minimal effort.
Having set the scene in part 1 let’s see what arguably the greatest living investor thinks about costs.
Warren Buffet’s annual letter to Berkshire Hathaway investors is always worth a read; they are often entertaining and always informative to anyone who invests or who might be looking to invest. I’m going to look at two of his letters, but you might like to visit the Berkshire Hathaway Index of Letters to read a few more for yourself. Think of it as an investment.
Meet the Gotrocks, their ‘Helpers’ and ‘Hyper-Helpers’.
In his 2005 letter Buffet has a section titled “How to Minimize Investment returns” where he tells the cautionary tale of the Gotrocks. The Gotrocks are rich, really rich – they own all American corporations and always will. Their vast wealth attracts various advisers and experts euphemistically referred to by Buffet as ‘Helpers’, ‘manager-Helpers’ and ‘hyper-Helpers’. Each time a ‘Helper’, ‘manager-Helper’ or ‘hyper-Helper’ helps the Gotrocks they lose money. Buffet reckons that this help costs 20% of the total return of the corporations owned.
“heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one"
The lesson from this is to minimise costs by reducing contact with unnecessary Helpers, manager-Helpers and hyper-Helpers. Passively orientated index investing fits this bill nicely. To this very point Buffet has some explicit wishes as to what happens to the portion of his wealth passing to his wife on his eventual passing.
Buffet – when I’m gone
“My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
The above is taken from Buffets 2013 letter.
Once again, the message is clear: costs must be reduced where possible as any savings will compound in the investors favour over time. Costs are one investment variable that you can control and are sure-fire way of improving your net returns. Reducing your exposure to conventional active funds is another easy-win. If’s it’s good enough for Buffett’s fortune then it’s good enough for you.
Finally, we have a short on video this topic: Why cost is even more important than before. You can watch the video here.
In part three we’ll look at costs and ‘Helpers’ using a very well know Hong Kong example.
In the meantime if you want to know how costs are impacting on your investment returns you are most welcome to contact us.
Links to part 1 and part 3.