2.2 Can Active Management Beat Index Funds?

The Trustees believe so and we agree with them, with one crucial stipulation: You must find the right manager. This is not so easy. In his annual meeting this year, Warren Buffett discussed the problems involved in finding investors who could actually beat the market. He said it was “very difficult”. If Buffett has trouble finding “market beating investors”, perhaps it is not surprising our own Trustees are having the same problem.

After many years of managing Berkshire’s investments on his own, and a few years of searching, Buffett hired two money managers, Todd Combs and Ted Weschler, whom he is so far very happy with. He hasn’t turned over all the assets of Berkshire to these two. Instead, he started them off with a small percentage of Berkshire assets. As they have proven themselves, he has given them more money to manage. Today they manage twenty-one billion dollars and are paid a yearly salary of one million each. That’s the amount they make for “just showing up for work”. Of course, if they beat the market by a large margin, Buffett will give them a huge bonus.

If Buffett paid his two investors at the same rates the AFM-EPF is paying ours, they would each be making $77,000,000 a year ($154,000,000 total), just for showing up to work. It is hard to imagine a realistic scenario where these two guys could do well enough that Buffett would write them a check for these amounts, even as a bonus.

If the Trustees are serious about finding a truly market-beating money manager, they should emulate Buffett’s approach. Or they can just hire Warren. Anyone can get Warren Buffett to work for them by the simple expedient of investing in Berkshire Hathaway Stock.10 If the AFM-EPF had fired all its money managers after the 2008 meltdown and just invested in Berkshire, we estimate the Fund would have between $4-$5 billion today. They would also have benefited from the enormous diversity of today’s Berkshire Hathaway and the huge cash cushion it provides.

10Disclosure: The authors are Berkshire shareholders.