Names of classics usually known but not always read

By DAVID MOON, Moon Capital Management, LLC
May 12, 2013

American Funds is the largest actively managed mutual fund family in the world. Its flagship funds are the Growth Fund of America, the Washington Mutual fund and the Investment Company of America fund. The fund family is managed by Capital Group Companies.

Can you name Capital Group’s CEO? Do you know the name of any of the company’s fund managers?

Of course you don’t, even if you own any of their funds.

Capital Group’s CEO, by the way, is Philip de Toledo.

If Mr. de Toledo offered to host an all day question-and-answer session with investors on a Saturday in the middle of nowhere, how many people would attend?

Omaha, Nebraska isn't exactly the middle of nowhere. It's more like the middle of everywhere, but close to nothing. Yet last weekend, 35,000 people filled an arena to see and hear Berkshire Hathaway CEO Warren Buffett and his partner sit and answer questions for almost six hours.

The questions in Omaha generally fell into about four basic categories that repeat from year-to-year. How are Berkshire’s operating companies performing? Does the company expect to make more big acquisitions? How is the economy? What happens when Buffett is gone?

Two years ago the hot investment theme was gold. This year the duo fielded questions about digital money.

Their responses sounded as familiar as the questions.

Stocks are actual companies, Buffett told the crowd, not pieces of paper or their digital equivalent. Prices and values of businesses tend to converge in the long term. The US economy is not going to hell. It is preferable to hold cash in the absence of compelling investment opportunities. Stocks are reasonably priced. Bonds are terrible investments. Trying to time or predict the stock market is futile.

Berkshire’s vice-chairman, Charlie Munger, repeated his mantra about ignoring short-term price fluctuations and concentrating on returns over the next eight years or more.

Munger is 89 years old.

Buffett’s Berkshire Hathaway has compounded pre-tax earnings more than 18 percent annually since 1970. It is understandable that Buffett is praised by many.

What is less understandable, however, is that he is modeled by so few.

The American Funds’ Capital Group manages open-end mutual funds worth almost a trillion dollars. While Berkshire’s capital base is fixed, Buffett’s asset base is $440 billion, less than half that of the American Funds.

Something is badly wrong with that picture.

Investors regularly dismiss Buffett’s guidance and guess the market’s direction over the next year – and guess with real money. Talking heads on CNBC prognosticate about the next week or month, inspiring individuals to do the same.

Many professional advisors, leery of actually taking a position, violate Buffett's practice of committing significant capital to a smaller number of outstanding ideas and instead, recommend their customers buy collections of mutual funds owning thousands of securities, then charge a fee for the illusion of active management.

And they often do this while proclaiming the genius of Warren Buffett.

Mark Twain said that a classic is something everyone wants to have read, but no one wants to read.

Warren Buffett is a classic.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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