On 2009-05-02, honda.lioness[at]gmail.com <honda.lioness[at]gmail.com> wrote:
- quote -

Buffett manages Berkshire Hathaway. He outperformed the S&P by 27%
last year. That is a fact that is fully separate from the price of
Berkshire shares.

Decisions to buy and sell the Berkshire shares, and prices of same,
are set not by him, but by individual investors. For any reason, they
decided to pay less for the company than they were willing to pay a
year ago. (similarly to how they decided that various other assets are
worth less now than they were a year ago).


i

Igor Chudov <ichu...[at]algebra.com> wrote:
On Warren Buffett as a financial sage --
- quote -

NY Times reporter Andrew Sorkin will be attending the annual Berkshire
Hathaway meeting that starts tomorrow. Sorkin wrote that the format
for the annual meeting this year is that two other reporters and he
will ask Buffett questions. He has invited readers to submit questions
for him to ask. One reader posted that his BH shares had declined in
value by about 33% since October when he bought them, whereas his
overall portfolio was down quite a bit less. What happened?
Specifically in the last six months BH is down about 21% vs. the S&P
500 being down only about 9%. See
http://finance.yahoo.com/echarts?s=BRK-B#chart10:symbol=brk-b;range=6m;compare=^gspc;indicator=volume;charttyp e=line;crosshair=on;ohlcvalues=0;logscale=on;sourc e=undefined

I do not think either your stats or my stats above say much of note
about Buffett's abilities.

Chip <chip.a.w...[at]gmail.com> wrote:
- quote -

I keep thinking, well why not use the same model for physicians and
auto mechanics? I think the difficulty is that real-world problem
solving, including finding the most appropriate investments for a
client, is so far from black-and-white and one size that fits all that
it is just not fair to pay a person only if the outcome is a
"success."

(What do we do with advisors like joetaxpayer who tell their around 80-
year-old clients to keep a large allocation in high grade bonds and
CDs? How is he going to make money in a bull market giving advice like
this? And yet, don't we want advisors to counsel most of our senior
citizens towards conservative allocations?)

This sub-thread also seems to look at investing and financial planning
as though it were a short term phenomenon. AFAIC prudent advisors
understand it is a long term phenomenon for most of the population and
convey the same to their clients.

Douglas Johnson wrote:

- quote -


Chip

"Chip" <chip.a.wood[at]gmail.com> wrote in message
news:gtci38$cuo$1[at]aioe.org...
- quote -


- quote -

YES - BUT

It isn't quite a simple as it sounds. This is known as "a performance based
fee arrangement" and it is allowed, though under very strict circumstances.

First, the advisor has to be allowed to do this through his broker/dealer
and many B/Ds won't approve such things. The hoops for the B/D with the
oversight boards are extensive so many shy away.

Secondly, the client must be an 'Accredited Investor" which usually means
that they must have a certain amount of investable assets or a history of
significant income.

Thirdly, most advisors and most B/Ds don't like the concept of not getting
paid when the portfolios take a down turn. After all they still have to do
the same amount of work, even if the portfolio fell in value. So they're
working for free and they don't like that.

Fourthly, even if the B/D allows a performance based fee arrangement, the
advisor has to jump through a ton of regulatory hoops to get it to fly with
the regulators.

Lastly, many clients don't like the idea of having to turn over what they
perceive as a significant amount of their gains to the advisor when the
media is telling them that advisor did nothing and the gains are the result
of the market.

For example, I am licensed for securities sales and advisory work with a B/D
that allows a performance based fee arrangement. BUT my B/D does not
directly offer this nor do they allow ME to offer it. Instead, my B/D
requires me to use a third party money manager that has already jumped
through all the hoops and has everything in place to make sure none of the
regulations are breached.

I'm a small fish in this game, I have about 125 financial clients, my
brother is also a licensed advisor with about 150 clients. Additionally, I
know quite a few other advisors and I've lurked and participated in this NG
for years. AND STILL I have one client on a performance based fee agreement
and I know of NO OTHERS.

Personally, I think performance based fee arrangements are a great option
for the reason you've stated. If I make you no money then I get no payday.
In fact, with the program the I use the fee is not only performance based
but it high-water marked as well. So if I start out with $500K of your
money and it goes down to $450K, I get no fee until I get your account back
past the $500K mark - adjusted for withdrawals of course. And the fee is
10% of the gains calculated on a monthly basis. So some months I make
nothing while other months I do pretty well. The interesting thing is that
when I compare the performance fee to a regular managed account fee the
difference is negligible.

You'll hear a lot of negative comments about performance based fees causing
advisor to take more risk than normal, which I think is bunk, for several
reasons:

First, the investment still has to be suitable for the investor or we risk
getting sued;
Second, most advisors live on client retention and client referrals. If we
do something that causes the investor/client pain, their don't keep their
money with us and they surely don't refer us new clients.

I wish I could give you list of performance fee based companies, but I
cannot - first I don't have one and secondly, even if I did this is NOT the
forum to release such information. If you search around you should be able
to find some.

Good luck,
Gene E. Utterback, EA, RFC, ABA

BreadWithSpam[at]fractious.net wrote:
- quote -


This is one of my criticisms of the hedge-fund compensation model so
it's kind of ironic to see it viewed as desirable. There are thousands
of hedge funds and hundreds of them close up shop every year (Hedge Fund
Research, quoted in Forbes, said 693 closed in Q3 2008 alone). Those
that close shop aren't the winners, but it's not as if they're giving
back the fees they earned. And every year new ones crop up that are for
whatever reason able to attract money and charge fees at 2-and-20.

Another way this can play out is on the conservative side. If the only
way to lock in a paycheck is with gains, it motivates the manager to
produce only gains. The only way to assure that is with low-risk
investments (blatantly circular here..."low risk" meaning "unlikely to
drop in value"). You won't have the blowout comp years that 2+20 can
provide, so instead just gather a larger pool of money, and "make it up
on volume". To give the appearance of activity, purchase long and short
positions with part of the portfolio that effectively cancel each other
out, and call it something like "proprietary long-short total return
model" in slick marketing materials. Some financial products and
strategies aren't really too far off of this, when you think about it.

These are extremes of "gaming the comp scheme" though and it doesn't
need to be so bad. But share-of-profits is better suited to a pure money
manager tasked with "beating the benchmark" rather than what I think the
OP was referring to (an adviser to an individual). And even that money
manager probably wouldn't agree to "profits only", instead making it
"performing better than my benchmark" - just because the stock market
(and other markets) do go down, no fault of the manager.

-Tad

Chip <chip.a.wood[at]gmail.com> writes:

- quote -

It's generally a violation.
See section 102 of the Uniform Securities Act:

(c) Except as may be permitted by rule or order of the Administrator,
it is unlawful for any investment adviser to enter into, extend,
or renew any investment advisory contract unless it provides in
writing
(1) that the investment adviser shall not be compensated on
the basis of a share of capital gains upon or capital
appreciation of the funds or any portion of the funds
of the client;

Why, you ask, might this be the case? Consider the scam artist
who goes out and tells half his clients to invest in a stock.
And then goes and tells the other half of his clients to short it.

There are exceptions to this rule, of course. It doesn't apply
to advisors to investment companies (ie. managers of mutual funds),
it doesn't apply to a contract relating to the investment of
very substantial assets (ie. rich folks - theoretically
"sophisticated" investors who would know whether their advisors
was scamming them, etc), and a few others.

But, no, generally, an Investment Advisor may not participate
in the cap gains.

Think, also, of what incentives that sort of thing gives aside
from just the scam suggested above. Such an advisor has every
reason to plow loads of money into the most risky stuff. If
it goes south, no skin off his back -- it's not his money to
begin with. But if it does well, he's rich. Sound anything
like the "risk management" at certain wall street firms?

- quote -

This model is precisely to keep it from being what you describe.

Probably the model with the least likelihood for the sorts
of shenanigans we're trying to avoid is either simple fee-for-
service -- either by the hour advise, fixed-length projects,
fixed retainer fee, or a percentage of assets under management.
And there are many investment advisors who work with exactly
those models.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

On 2009-04-30, Don <dwzimm[at]telus.net> wrote:
- quote -

Let's remember one thing.

The things that cost much less now than they did 2 years ago, are
actually less risky now than they were 2 years ago, for a simple
reason -- they are a lot cheaper and properly recognize (if not
over-recognize) the possivbility of loss.

Our perception of risk went up, but the actual risk went down.

i

Don <dwzimm[at]telus.net> wrote:

- quote -

Of course, I would have some of the clients on the short side, thus making
money if the market went up or down. -- Doug

Tad Borek wrote:


- quote -

Recently in Missouri, we had a sitution where the state fund managers
got bonuses even though the funds (like pretty much everything) lost
value. However, they'd beaten the reference benchmarks signficantly. So
there's debate about whether they deserve bonuses for not losing as
much as they might have.

Of course, there's debate it should be a bonus system at all.




Brian

--
Day 87 of the "no grouchy usenet posts" project

Chip wrote:
- quote -

More blather:

1. it's illegal under federal securities laws, unless you meet some
high-net-worth criteria (see Rule 205 of the Investment Advisers Act of
1940). For reasons like those Doug mentioned.

2. it implies a "worth paying for" adviser is one who can consistently
predict impending drops in the stock market, thereby avoiding losses.
That's not just being a good adviser, that's divinity.

3. ideally advisers do things that deserve compensation even if the
stock market happens to drop. Not always the case of course.

-Tad

On 2009-04-30 09:58:37 -0700, Douglas Johnson <post[at]classtech.com> said:

- quote -

Also, there would be certain time periods, like today's serious
decline, when very few of the high risk, high reward investments would
be profitable, let alone the conservative ones, so an advisor would
very likely receive nothing or very little income from most clients,
perhaps no income at all for as long as a year or more. Somehow, I
suspect that possible outcome explains the absence of the approach,
more than the risk of fraud.

Douglas Johnson wrote:
- quote -

Thank you, that simple explanation makes more sense than all the blather
I have heard from various advisors.

Chip

Chip <chip.a.wood[at]gmail.com> wrote:

- quote -

Because this approach ignores risk. If I were such an advisor, and lacked
ethics, I would put each of my clients into a different high risk, high reward
investment. Some would win and I would make money. Some wouldn't. That's OK,
I lose nothing. Of course, I use my winning clients for references.

Although some hedge funds compensate their managers with what's called a 2/20.
The managers get 2% of the net assets each year and 20% of the gains.

-- Doug

rick++ wrote:
- quote -

advisors a question?

Why don't financial advisors use the "agent" model for reimbursement?
That is, accept 5-10-or even 15% of MY financial gain as compensation.
If I lose money on your recommendations, you get $0 (not negative).
This model has worked quite well in the entertainment and sports world,
why not the financial? Makes the agents really hustle to get gigs for
their clients! If I win, you win. If I lose, I get a more competent
agent. Sounds like the free market to me.

All I hear is a tap dance of chase the tail arguments about fiduciary
integrity and other balderdash.

Does any advisor work on this model? Or are they all bookies that don't
care if you win or lose, just so they get the vigorish?

Chip

I think many advisors chase new fads so you have
to pay them more to move your money around.

On Apr 29, 7:14*pm, Ron Peterson <r...[at]shell.core.com> wrote:
[snip]
- quote -

Yes, may I add "increasing earnings," and "grasp the basis of the
business," and "sell when revenues show signs of flattening." (Or, to
reminisce about the happy days of Calculus 101 before I started to get
bonked on the noggin but such things as EMH and Random Walks, sell
when the second derivative has been negative for a couple of years.)

The truth is often right in front of one's nose. Seeing it is an
entirely different matter, requiring the strongest of virtues.

Igor Chudov
- quote -

We disagree on what EMH says.

- quote -

Come on. Your version and what you quoted are different. Plus you are
still disregarding the academic nature of the tenets of EMH.

- quote -

But Grahamians do not beat the market all the time. Which is the same
weakness of betting on the total market: Sometimes you win, sometimes
you lose, but mostly for the long term you win. So do we throw out
both approaches? No. Both value investing and EMH have merit.

- quote -

I am confident that when Buffett buys a stock for BH he is saying he
thinks it is a good stock. I call that just one of many examples of
stock advice he gives.

We disagree. I think I will depart this with the suggestion that
people read about EMH on their own.

On 2009-04-30, honda.lioness[at]gmail.com <honda.lioness[at]gmail.com> wrote:
- quote -

No, EMH states that it is impossible for anyone (besides, perhaps,
corporate insiders) to beat the market, not merely difficult for most
people.

``The efficient-market hypothesis states that it is impossible to
consistently outperform the market by using any information that the
market already knows, except through luck.''

- quote -

I posted a link to a PDF file that shows several people, most
associated with Ben Graham, who beat the market rather
consistently. I recommend reading it, as it is well written.

However, none of what I said suggests that anyone can beat the market
with any kind of a recipe. But the article shows convincingly that
some bright people, who share a common background and approach, could
do so in a manner that would not be possible randomly.

Most people probably cannot beat the market consistently. But EMH
states that no one can.

- quote -

There are two meanings of value investing. One is buying stocks with
low P/E or low price to book ratio. It is comparatively easy and is
described as "stock screen".

Another approach is understanding how businesses operate and finding
ones that are more valuable than they are priced. The first approach
is easy and the second is very difficult. Essentially, you would need
to have a business insight better than that of other, sophisticated,
people, analyze competition, and things like that.

While doing so is very hard, it is not impossible, as EMH claims.

- quote -

Buffett does not give stock advice.

Last year S&P 500 lost 37%. Berkshire Hathaway lost 9.6%. Big
difference. That amounts to 27.4% outperformance.


i

Igor Chudov <ichu...[at]algebra.com> wrote:

- quote -

It's always been "hypothesis" to me. The reason is that it is a
concept; a broad generalization; a comment on the nature of economies.
If one tries to take it literally, then of course holes will be poked
in it.

All EMH means to me is that it is difficult to beat the market when
buyers and sellers are operating with essentially the same
information.

So I do not understand your protests to EMH. Is it that you want to
argue that a value investing strategy beats investing in the market as
a whole? If so, over what time period? In other words, if a value
investing strategy does not always beat the market as a whole over all
time periods, then I guess value investing is not necessarily the way
to go, either.

Both EMH and value investing make broad comments about the nature of
markets. Both have their uses.

- quote -

Warren Buffett was fooled like everyone else when he plowed money into
a certain bank (and other financials?) a little before last year's
crash. He is generally a careful person, and generally worth listening
to, but I am not convinced he is the prophet nor even financial
scholar so many paint him as. His decisions on behalf of Berkshire
Hathaway deserve as much scrutiny as the advice of Scott Burns, Jim
Cramer, Suze Orman, Jeremey Siegel, and so on. Buffett is not above
the fray. I advise not giving him too much deference.

Otherwise, applause for Richard's post.