“Compound interest is the eighth wonder of the world.
He who understands it, earns it.
He who doesn’t, pays it.”
- Albert Einstein
Or at least we’d like to think Einstein said that. It’s unverified, and no one knows for sure, but like many supposed Churchill quotes that just seem more powerful and relevant if he actually spoke them (many, he didn’t), we’re going to let it slide. Because compound interest, is indeed, truly wonderful.
Evidently, the closest thing we in financial markets have to Albert Einstein or Winston Churchill, is Warren Buffett. Warren’s long-term track record is nothing short of incredible. He has a few detractors, but mostly legions of fans that read everything they can about him, quote him on a weekly basis, and fly to Omaha every May for the Berkshire Hathaway annual meeting. We ourselves have reiterated his folksy advice for years, as well as those from his mentor, Ben Graham.
And, as usual, Buffett has some great one-liners in this year’s Berkshire Hathaway Annual Letter:
“Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase.”
“Investment bankers, smelling huge fees, will be applauding as well.”
“If the historical performance of the target falls short of validating its acquisition (price), large ‘synergies’ will be forecast. Spreadsheets never disappoint.”
“At Berkshire, in contrast...we also never factor in, nor do we often find, synergies.”
The Oracle of Omaha also makes some of his same old mistakes (e.g. confusing risk with expected returns), but he certainly has given many more pearls of wisdom to the industry than he has taken from it. So, I’m willing to let it slide that his special access to deals means that the playing field hasn’t been fair. I’m even willing to let slide his transformation in the late winter of his career. Most stock-pickers grow old and find religion. Warren has seen the light in a different way. After years of minimizing and outright avoiding taxes (legally, mind you, I assume); now that he has money that even Einstein might have trouble comprehending, he is advocating that everyone should pay more taxes.
That’s fine. He and Bill Gates can take tricks from each other and state that the US government should be expropriating more and more of its citizens’ capital to their heart’s content. But when he starts making fun of the people that know the difference between alpha and beta; well, that’s a step too far!!!
So we are not going to let this perpetuated myth slide that Buffett is continuing to beat the market. Sure, he beat Ted Seides and Protégé Partners in the fund-of-funds bet; but that was apples and oranges, and it did temporary (irreparable?) damage to the industry of “helpers” as Buffett likes to call them. FoFs, OCIOs, consultants and other “helpers” may individually have specific issues (namely fee-layering and/or beta-camouflaging), but they were never supposed to be a substitute for the S&P 500, nor did they take 100% equity risks in the process. So, over a ten year period during which the S&P 500 surged 125.8%, yes, the index not only routed the average of the five unnamed FoFs, it trounced each of them individually. This should surprise no one, even the FoFs or their ultimate investors themselves. Yet it still prompted a bit of gloating from St. Warren.