Heavyweight investor and Berkshire Hathaway vice president Charlie Munger has said investment managers live in “extreme denial” about lagging index returns and argued charging high fees for underperformance is “moral depravity”.
Speaking at the of Daily Journal Corporation, Munger (pictured) responded to a question authored by ChatGPT asking about the hardest mental biases to overcome.
“One factor that dominates human bad decisions is denial,” he said.
“If you want an example of denial affecting things, take the world of investment management. How many managers are going to beat the indexes, all costs considered? Maybe 5% consistently beat the averages; everybody else is living in a state of extreme denial.
“[Active managers] are used to charging big fees for stuff that is not doing their clients any good. It is a deep moral depravity.
“If a widow comes to you with $500,000 and you charge 1% a year, you could put them in the indexes, but you need your 1%, so you charge someone a considerable fee for worthless advice.”
Warren Buffett’s business partner went on to say it is possible to outperform in the long run by picking good businesses led by good managers, but the odds of doing so are low and the agency costs in money management “are so many billions, it is uncountable”.
He added the other issue with US companies is finding these “good businesses” before everybody else does, with a “great business” often trading at 25 to 35 times earnings.
“That is what makes investment difficult. The good businesses do not stay cheap,” Munger said. “You have got to recognise a good business before it is recognisable as a good business and that is very hard to do.
“Some people get good at it but not many. I think 95% of the people working as professional asset managers in America, I would not want working for me. I think it is that hard, you have to be in the top 5%.”
Instead, he argued the majority of investors should be content with low-cost, market-rate returns yielded by passive investing.
“What is not difficult is to buy an index fund and sit on your ass. That is the great default position,” Munger added.
“We have just put in a 401k plan for the Daily Journal Corporation. What are the investment options for the [employees]? Zero. It is all index funds.”
However, he reiterated concerns raised at the company’s last shareholder meeting, when he decried index funds’ growing interest in pursuing corporate governance goals beyond fiduciary duties.
“It is a very serious issue because it is an enormous amount of power,” Munger said. “For a while, these index funds got to feel like they were suddenly made godlike, to clean up the world.”
He went on to praise Vanguard’s recent course change after it withdrew from the Net Zero Asset Managers (NZAM) initiative.
“Vanguard has retreated from that policy and I think wisely so. I have some hope that Larry Fink will follow. I do not think it is smart for these index funds to try and influence the policy and politics of the country,” he said.
He concluded, saying asset managers including BlackRock, Vanguard and State Street Global Advisors (SSGA) should be content with removing “some of the folly from investment management”.
“I have no feeling that anyone at Vanguard or Larry Fink’s operation has any special genius on how American corporations ought to be run. To the extent that they ask Berkshire Hathaway to do this or that, I wish they would stop.”
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