Sat, 10 Mar 2012
Pay Less

Warren Buffett, the well known investor/businessman, has/had a fortune of $62 billion. That's a lot of money. How much would he have if he had out-sourced the management of his investments to a typical financial management service?

From John Kay's book, The Long and The Short of It :

Suppose that Buffett had deducted from the returns on his own investment - his own, not that of his fellow shareholders - a notional investment management fee, based on the standard 2% annual charge and 20% gains formula of the hedge fund and private equity business. There would then be two pots: one created by reinvestment of the fees Buffett was charging himself; and one created by the growth in the value of Buffett's own original investment. Call the first pot the wealth of Buffett Investment Management, the second pot the wealth of the Buffett Foundation

How much of Buffett's $62 billion would be the property of Buffett Investment Management and how much the property of the Buffett Foundation? The - completely astonishing - answer is that Buffett Investment Management would have $57 billion and the Buffett Foundation $5 billion. The cumulative effect of 'two and twenty' over 42 years is so large that the earnings of the investment manager completely overshadow the earnings of the investor. That sum tells you why it was the giants of the financial services industry, not the customers, who owned the yachts.

This shows how big a deal cumulative interest is. Astonishing is the right word.