Buffett on pension fund managers in 1975

Tom Business, Reading 3 Comments

I hope I have even 5% of his wisdom when I hit 44. Don’t mind on what subject, but something would be nice.

“If above-average performance is to be their yard stick, the vast majority of investment managers must fail. Will a few succeed — due to either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance — just as would be the case if 1,000 ‘coin managers’ engaged in a coin-flipping contest. There would be some ‘winners’ over a five or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly ‘successful’ records — who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)”

The full letter is on Scribd.

Warren Buffett Katharine Graham Letter by Fortune

Comments 3

  1. Moray McConnachie Post
    Author

    Does the opener make sense though? Assuming investment managers’ performance is normally distributed then it can’t be true that the “vast majority” can fail to achieve “above-average performance”, just a majority. I think he means that if the goal of investment managers is long-term outperformance of the market, then the vast majority will fail. But in practice it is important to remember that the goal of most is simply not to significantly underperform their benchmark.

  2. Tom Raggett Post
    Author

    Average performance is a +/- range around the mean (1sd?) rather than the mathematical point, as I read it. Depending on the shape of the curve, maybe “vast” is overkill, but it could certainly be 80%+ of managers who fall into the average or below buckets.

    And yes, I agree with your point about not underperforming the relevant benchmark: this is Buffett’s point in the letter: why pay aggressive management fees for this, when the benchmark is public?

  3. Moray McConnachie Post
    Author

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