The Investment Scientist

Archive for October 2010

These are Warren Buffet’s own words. As usual, they are as humorous as insightful.

“In 2006, promises and fees hit new highs. A flood of money went from institutional investors to the 2-and-20 crowd. For those innocent of this arrangement, let me explain: it’s a lopsided system whereby 2% of your principal is paid each year to the manager even if he accomplishes nothing – or, for that matter, loses you a bundle – and, additionally, 20% of your profit is paid to him if he succeeds, even if his success is due simply to a rising tide.

“…The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these hyper-helpers. Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money

Going Somewhere?

[Guest post by Tom Warburton] Most of us who have survived and thrived in the money management industry were trained under the traditional model of ‘getting in front of somebody and making a pitch’.  Our ‘pitch’ was designed to make us look smart and normally started out with something like “our best idea right now is blah blah”.

Thanks to our persistence and personal charisma we succeeded in winning a few clients that referred more clients and ultimately created a book of business from which we could make a living.  So off we went with more ‘best ideas right now’ and more ‘blah blah’.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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