Would You Hire Warren Buffet to Manage Your Money? Are Investment Managers Useless?

Posted on May 2nd, 2009 by admin in How to Invest

Almost every money manager lost money in 2008. So, what answers do you give to these questions? (My answers below):

  1. Most money managers are incompetent (True/False/Can’t say)
  2. Most money managers are unlucky (True/False/Can’t say)
  3. One should avoid money managers except for oneself (True/False/Can’t say)

My answers:

1/Can’t say

2/Can’t say

3/Can’t say

As I’ve commented extensively in previous posts, last year’s manager performance tells you almost nothing about the skills of the manager, so to conclude anything based on a truly rare market condition as in 2008 is completely irrational, even though exceptionally tempting! 2008 was the year of the Great Bear Correlation, and the Bear created fear that dominated all other investing factors.

In 2008, even Warren Buffet and his managers lost substantial money. Here’s the detail on Mr. Buffet’s self-analysis at his board of director meeting in Omaha and his take on judging money managers. After you read this, ask yourself if you’d want Warren Buffet to manage your money for next twelve months!

Buffett Calls Investment Candidates’ 2008 Performance Subpar

By Hugh Son, Erik Holm and Andrew Frye

May 2 (Bloomberg) — Billionaire Warren Buffett said all of the candidates to replace him as chief investment officer of Berkshire Hathaway Inc. failed to beat the 38 percent decline of the Standard & Poor’s 500 Index last year.

“In terms of 2008 by itself, you would not say that they covered themselves with glory,” Buffett said today during the annual shareholder meeting of Omaha, Nebraska-based Berkshire. “But I didn’t cover myself in glory either in 2008.”

Buffett, 78, Berkshire’s leader since the 1960s, has said there are four candidates to succeed him managing a portfolio including more than $50 billion in U.S. stocks as of Dec. 31. He said two years ago that he would audition managers who are “genetically programmed” to avoid large risks.

Buffett’s duties will eventually be split among a chief executive officer, at least one person to manage investments, and his son Howard Buffett, who has been picked to be the next chairman. While the candidates for CEO already work for Berkshire, at least one of the contenders for the investment post is an outsider, he said. He hasn’t publicly identified any of them or the holdings they oversee.

“Their record over 10 years has been everywhere from modestly to significantly better than average, and I would be willing to bet the same over the next 10,” Buffett said. “Certainly last year there were a lot of things that didn’t work, and our group was not exempt from that.”

Shareholders met today in Omaha to hear Buffett opine on Berkshire, which slipped 32 percent in New York trading last year, the worst annual performance in at least two decades.

Getting ‘Creamed’

Buffett has chastised himself for an ill-timed investment in oil producer ConocoPhillips. Among his other errors for 2008, Buffett listed in his annual letter the purchase of shares in two Irish banks that he didn’t name for $244 million. Berkshire wrote down the stake by 89 percent.

Almost every investment manager “that I regard as intelligent and disciplined and has a record of past success, they all got creamed last year,” said Charles Munger, vice chairman of Berkshire, at the meeting.

Last year’s drop for the S&P 500 was the index’s worst year since 1937. The benchmark for American equities had its biggest monthly advance in nine years in April, gaining 9.4 percent, paring the S&P 500’s year-to-date loss to about 2.9 percent.

While Buffett hasn’t changed his roster of potential investment heads after last year’s performance, he is “always looking for more people” to add to the list, he said. Berkshire’s succession plans are the most important task of the board, he has said.

‘Ratings Downgrades’

Fitch Ratings stripped Berkshire of its AAA rating in March, citing Buffett’s mortality as one reason for the downgrade. Berkshire’s past performance has been “intimately tied to Mr. Buffett,” Fitch said.

Buffett built Berkshire over four decades from a failing manufacturer of men’s suit linings into a $140 billion company by investing in out-of-favor stocks and buying dozens of businesses ranging from insurance and underwear to ice cream and utilities. Buffett says his ideal time horizon to hold a stock is “forever,” and he purchases operating companies for Berkshire with the promise to their owners never to sell them.

Berkshire stockholders and Buffett-watchers have long speculated about who will fill the CEO position. Barron’s has reported that David Sokol, the head of Berkshire’s MidAmerican Energy Holdings Co., was the most likely successor. Sokol said in an interview with Bloomberg Television he hasn’t discussed succession with Buffett.

‘Never a Word’

“Never a word,” Sokol said. “Unfortunately my name comes up because people try to come up with names.”

Tony Nicely, the head of Berkshire’s Geico Corp. car insurance business, and Ajit Jain, who runs a unit that sells reinsurance, are also on media lists of potential successors.

Replacing Jain, whom Buffett talks with every day, would be “impossible,” the chairman told investors today.

“You can do enormous damage in the insurance business with your pen, and we’ve given our pen to Ajit in a way we wouldn’t give it to anybody else,” he said.

The board charged with picking Buffett’s replacement currently includes Microsoft Corp. co-founder Bill Gates and Munger.

“It’s probably the biggest single topic we spend time on,” said Gates, the only person ahead of Buffett on the latest list of the world’s wealthiest people by Forbes magazine, in an interview with Bloomberg Television. “We always have to think about what might happen and make sure Berkshire is not just great now, but forever.”

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Erik Holm in Omaha at eholm2@bloomberg.net; Andrew Frye in Omaha at afrye@bloomberg.net

Last Updated: May 2, 2009 15:55 EDT

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