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Buffett: Cut your gains!

March 06, 2006

In his 2006 letter to Berkshire Hathaway shareholders, Warren Buffett explains how costly it can be to let advisors come between you and your money. Warren Buffett often uses his annual report to comment on subjects he believes of importance to today's markets. Here, from the report published Saturday, is an allegory about "How to Minimize Investment Returns."

It's been an easy matter for Berkshire and other owners of American equities to prosper over the years.



Between Dec. 31, 1899, and Dec. 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this piece.)

This huge rise came about for a simple reason: Over the century, American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company's losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B.

http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm?section=money_latest

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