And then....the fees just fall out of the sky.

30 years ago this month Warren Buffett wrote the following words in his annual letter to shareholders:

We do not have, never have had, and never will have an opinion about where the stock market, interest rates or business activity will be a year from now.
— Warren Buffett, 28th February 1989

Warren Buffett is one of, if not THE, greatest investor of all time.  And he doesn’t concern himself with thinking about the stock market, interest rates or business activity in the coming year.

Warren Buffett has endured when many others have not.  I was listening to a podcast the other day with Michael Batnick and Ben Carlson and they posed the question ‘why are there no star fund managers under the age of 60’? 

There really aren’t.  All the famous investors are older.  There have been a few that looked good for a few years and were touted as the next Warren Buffett, but then floundered and failed.

Let’s take David Einhorn for example.  Einhorn started his fund Greenlight in 1996 at the age of 27.  Over the next ten years he became a star due to annualized returns of 26 percent.  He made big bets, mostly against companies (he was what we call a short-seller) and they paid off.  In 2007 he bet against Lehman Brothers and his title as ‘the next hot thing’ was seemingly secure.

It turned out not to be.  Since 2009 Einhorn has underperformed the market every year.  His shorts on Amazon, Netflix and Tesla haven’t helped him (when you ‘short’ a company you bet against it and you ‘win’ if the stock goes down – Amazon, Netflix and Tesla haven’t gone down).  2018 was his worst year ever – his fund lost 34% versus the S&P fall of 4.4% (on a total-return basis).


Here’s another one.  John Paulson.  Same basic story.  Here it is told by my new favourite writer Matt Levine:

Paulson “produced steady gains” in merger arbitrage for a while, foresaw the financial crisis, bet against subprime mortgages, made a vast pile of money, “was managing $38 billion and was firmly among Wall Street’s elite,” and “then he went cold,” losing lots of client money on bad bets on gold miners and a Chinese forestry company and pharmaceutical companies and an S&P 500 short. “Today, Paulson & Co. is managing under $9 billion—most of it Mr. Paulson’s own assets. ”
— Matt Levine

As an aside, this tells you something about the hedge fund industry – Mr Paulson is quoted as having said:

“The other thing I love about this business, when I say why I went into this business, is the fee structure.  The fees just fall out of the sky.”

Can you imagine?  This man is actually walking around saying, ‘yeah, the reason I really love this work is that I get to charge people ridiculous fees and they pay those fees, and it doesn’t really matter how my fund does, I still get to charge those fees.  So now I am really really rich and have lost all my clients a ton of money, I think I’ll stop.’

Across the pond we see exactly the same thing.  Famed European hedge fund manager Philippe Jabre wrote in an investor letter last year:

The last few years have become particularly difficult for active managers.  Financial markets have significantly evolved over the past decade, driven by new technologies, and the market itself is becoming more difficult to anticipate as traditional participants are imperceptibly replaced by computerised models.
— Philippe Jabre

How contradictory are these comments from these hot-shot hedge fund managers to Warren Buffett’s quote about not having an opinion about where the stock market, interest rates or business activity will be a year from now. 

These poor hedge fund managers are finding things hard because they can’t anticipate the market anymore. But if you are Warren Buffett and you never anticipated the markets in the first place, then nothing has got harder.  He is still playing exactly the same game.  The hedge fund managers have found themselves on a tennis court trying to play basketball.

We have entered a world where people give their money to someone precisely because they do have an opinion on the market, interest rates and business activity (and doesn’t that make them seem really smart).  It seems to me that those opinions are worthless, and in fact they have negative value, because those people have all died, and the man without the opinion has endured.

I always say that everything about money and investing is counter-intuitive and this is another example of that.

While Warren Buffett was busy not thinking about the markets, interest rates or business activity over the last 30 years, the S&P 500 has gone from 288.26 on 28th February 1989 to 2700 today.  This is the price movement and ignores the dividends paid out by the market. Cash dividends for the S&P 500 were $11.73 in the full year 1989 and $53.61 in the full year 2018 (your income went up around four and a half times whilst inflation as measured by the Consumer Price Index approximately doubled).

So, for what it’s worth, if you ask me what the markets are going to do or where interest rates are headed, or how fast the economy is going to grow this year, I will honestly tell you ‘I have absolutely no idea’.  I might also add ‘and it can’t matter.’ 

All I know is what my friend Nick Murray writes:

When will we ever learn?  It was never about “timing the market”.  It is always about TIME IN THE MARKET.

I know which horse I am backing.

Georgina Loxton