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Rupert Hargreaves
Rupert Hargreaves
Articles (1366)  | Author's Website |

Warren Buffett's Advice on Finding Wealth and Fund Managers

A look at some comments Buffett made about finding good investment managers

October 26, 2020 | About:

Finding an investment advisor or wealth manager can be a challenging process. There are so many bad, expensive managers out there; the odds are stacked against the average investor.

This has led to an increase in the demand for so-called robo-advisors in recent years. These automated platforms manage and allocate wealth on your behalf, and they can be cheaper and easier to manage than traditional investment advisors.

But that does not necessarily mean that they are better. There are many reasons why someone might benefit from having a wealth manager. Psychologically having someone to talk to in a market downturn can significantly help reduce anxiety.

Further, a good wealth manager will get to know your personal risk tolerance and financial situation and then design a plan around your needs and wants. Robo-advisors only provide limited guidance in this respect. It's also always helpful to talk ideas through with another person - even if you are a competent investor.

Research and quality

One of the keys to selecting a good wealth manager or fund manager is understanding how they achieved their results. With a bit of luck, anyone can make big profits in the stock market. However, consistently earning market-beating returns is a different game altogether.

Some fund managers have managed to achieve this target. Still, research shows that individual investors are often too concerned about volatility to stick with the managers long enough to see the returns materialize.

Investors often sell because they don't know why the fund or investment has lost value. This problem can be easily rectified with research. If one knows the investment strategy the manager is following and knows why the value of their investments has fallen, it's easier to look past this short-term uncertainty and concentrate on the future.

Warren Buffett (Trades, Portfolio) covered this topic at the 2004 Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) annual meeting of investors. An audience member asked the Oracle of Omaha if he had any advice for investors who struggled to find the time to do their own research and wanted to employ an investment manager to take care of the process. Buffett responded:

"The question of finding other advisers is a tough one. I mean, when I wound up my partnership in 19 — at the end of 1969 — and I had all these partners that had counted on me and I was going to mail them back a lot of money, you know, I felt an obligation to at least suggest some alternatives for them. And I recommended two people who I knew were exceptionally good and exceptionally honest... I not only knew their results, but I knew how they'd accomplished their results, which is terribly important."

Unfortunately, he continued, there was a tiny portion of competent investment managers, which made it very difficult to find operators that have all stakeholders' interests in mind. He went on to offer some advice regarding the kind of managers investors should avoid at all costs:

"The one thing I can almost guarantee to you is that the promotional types going around to solicit the institutional investors are very unlikely to meet any long-term tests of ability, and sometimes, integrity."

The bottom line

If there's one thing we should take away from these comments, it is that highly promotional managers should be avoided.

When he wound up his early investment partnerships in the late 1960s, Buffett only recommended two investment managers. He had been watching most of these managers for years, knew how they worked, knew they could be trusted and understood the investment process that would be used to help his former investors.

This is a template anyone can use to find wealth, investment and fund managers. It won't give you results overnight, but just like selecting individual stocks, the best way to reduce risk is to do your research.

Disclosure: The author owns shares in Berkshire Hathaway.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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