Visiting the Oracle of Omaha

Now, this is something that could make me enroll in an MBA:

Some 15 times a year Berkshire CEO Warren Buffett invites a group of business students for an intensive day of learning. The students tour one or two of the company's businesses and then proceed to Berkshire (BRKA, Fortune 500) headquarters in downtown Omaha, where Buffett opens the floor to two hours of questions and answers.

This time, it was students from Wharton. The Wharton MBA is ranked as the best in the world by the Financial Times.

Buffett has repeatedly stated that he thinks he would make a lousy CEO and thus is happy to let the managers of the companies he buys for Berkshire keep their posts. Here's how he told the Wharton whizz kids:

But if you gave me the choice of being CEO of General Electric or IBM or General Motors, you name it, or delivering papers, I would deliver papers. I would. I enjoyed doing that. I can think about what I want to think. I don't have to do anything I don't want to do. It might be wonderful to be head of GE, and Jeff Immelt is a friend of mine. And he's a great guy. But think of all the things he has to do whether he wants to do them or not.

Lesson: do what you love.

Make yourself a favor and read the whole thing.

Berkshire 2007 Newstletter

Warren Buffett's anual letter to Berkshire Hathaway shareolders has been published. You can read it here (pdf). You can learn more about investing reading those letters than with any book that I can think of. Here are the previous letters since 1977.

The guy's made a ton of money with Amazon bonds. How's that for a dinosaur that was supposed to have no understanding of the internet revolution?

Investing for the long term

This is a topic that will be frequently addressed here. I'm very interested in investing, not in playing games with the market. My admired Megan McArdle calls stock-picking and fund-picking "a very expensive hobby". Financial markets are generally very efficient and most of the existing information about any stock is already priced-in. That does not mean that it is impossible to beat the market. It's just terribly difficult. Warren Buffett famously said about the EMH:

I'd be a bum on the street with a tin cup if the markets were always efficient.

The professors who taught Efficient Market Theory said that someone throwing darts at the stock tables could select stock portfolio having prospects just as good as one selected by the brightest, most hard-working securities analyst. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient.

So, what's one to do? Should you try to cherry-pick a few very promising (for you, anyway) stocks and high-fee mutual funds? The answer, in my humble opinion is no. The important thing here is what Mr. Buffett actually compares: he mentions someone who is the brightest most hard-working securities analyst. Do you think he's talking about you and me? Security analysis and equity valuation require very hard work and long hours of study. Being really smart doesn't hurt either.

Mr. Buffett himself has repeatedly recommended low cost index funds as the best investment alternative for most of the people who don't have the time, the skills or the talent to perform market-beating analysis. Every now and then a study comes out pointing the ridiculously low percentage of professional money managers that consistently beat the markets (before fees!).

Here we reach a point were a few country-specific differences start to matter. Most of the investment advice you can find on the internet is specific for American investors, those lucky yanks, who have access to an incredibly broad and competitive market of financial products. When you talk about low cost index funds, for an American investor you're talking of TERs around 0.3% or lower (Vanguard Funds come to mind). Try to find that in Spain! The cheapest index funds that I've found available in Spain (from INGDirect) charge a whopping 0.99%. Taking into account the power of compounding, over a long time that difference makes for a big chunk of money (that you won't have). Besides, a portfolio of 50 (admitedly very important) companies like an EuroStoxx50 index fund has, is not what I would call buying the market. So for us poor Spaniards, the available index funds are few and expensive. Yikes.

Usually, in advanced and mature markets, there's an even cheaper (Vanguard's VTI has an expense ratio of 0.07%) alternative to index funds: ETFs. ETFs provide an easy way of diversifying a portfolio and gaining exposure to different markets, sectors and regions. But. You have to keep in mind an ETF trades like any other stock and that means that you'll need a broker. In Spain brokers are very expensive compared with the available alternatives in other countries. You have to pay, for example, something called "custody fees" (comisión de custodia), i.e. a percentage of the value of the stocks you purchased with your broker that you pay anually (or quarterly or even monthly). That's in addition to the buy/sale fees.

All this means that even taking the ETF route it is almost impossible to stay below the 1% level of expenses.

The good news: after a long time searching, I've found a broker that doesn't charge that custody fee and has a very rich offer of ETFs (INGDirect doesn't charge that fee either, but you can't purchase ETFs with them). SaxoBank is a Danish bank with an office in Marbella. The buy/sell fees are normal (for Spain) and you can check the available ETF's here (you may need to select the all regions option).

(Full disclosure: I don't receive any kind of commission from any of the companies mentioned in this post. I'm not even a customer of SaxoBank. Yet)