Money: Mr Buffett should have watched more movies

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The Independent Online
Regular readers of this column will know of our preference for long-term investing. The Motley Fool follows the teachings of great investors such as Warren Buffett. He has built up his wealth by relatively simple means - investing in a few great companies when they were trading at attractive prices and holding on to them for a long time. Mr Buffett's preferred holding period is "forever". He says he will never sell his company's 200 million Coca-Cola shares. Given that they are trading around the $60 (pounds 37) mark, that is $13bn he and his shareholders can do without. Are you envious? I am.

Despite his huge success, 1998 wasn't a great year. In his chairman's report to shareholders of Berkshire Hathaway, he said: "The portfolio actions I took in 1998 'decreased' our gain for the year. Overall, you would have been better off if I had regularly snuck off to the movies during market hours." He also said he thought some problems were temporary.

Time is on Mr Buffett's side. In contrast, highly paid professional fund managers face a difficult task. Their goal is to maximise returns in the short term, meaning over a year or even less. They are compensated on that criterion, and their employers demand results. It is a dog-eat-dog world, and patience is not one of the virtues financial services companies possess in any great quantity.

Financial services companies want to see their unit trusts at the top of the annual performance tables. When looking for a home for their hard- earned cash, consumers gravitate to the current top performers.

But at this stage it is worth saying that a large proportion of unit trusts fail to beat the market. They may finish top of their particular little sector, yet that may be many percentage points behind the FT-SE 100 index. The comparison numbers are conveniently omitted from the advertising blurb.

One of the reasons that most funds fail to beat the index is their forced focus on the short term. It means they chase the latest hot stocks, feverishly trading in and out of shares. This year, many would have started out with overweight positions in telecom and pharmaceutical companies. They were the darlings of last year and at the beginning of 1999 it was hard to see them being knocked from their perch. Yet, so far this year, the latter sector in particular has underperformed the market. GlaxoWellcome began the year at 2,068p and now trades around 1,850p, a fall of more than 10 per cent in a market up roughly 11 per cent.

In contrast, 1999 has seen sectors such as oil and construction come to life. BP Amoco is up from 898p to about 1150p, or 28 per cent. Barratt Developments has shot from 233p to about 350p, a 50 per cent gain in four months.

The chances are that fund managers, conscious of their short-term targets, are now switching out of the Glaxos and into the BPs. However, this comes at a cost. Dealing charges quickly mount up, including the bid-to-offer spread, and this adversely effects the overall performance of the fund.

This is one of the reasons why individual investors have a big advantage over the professional fund managers. We have only got to be accountable to ourselves. Time is on our side.

It is pretty difficult to beat the market every year - even Mr Buffett couldn't manage it in 1998 - but over longer periods the buy-and-hold philosophy has every chance of success. At the very least, you can match the returns of the market by buying an index- tracking fund. To beat the market you've just got to buy shares in the right companies! It's easier said than done, but far from impossible. We'll look at stock-selection techniques next week.

Motley Fool,

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I'm not very proud of this but in late February 1998 I bought Telewest at 79p per share. I work in the telecommunications industry and I was certain they were undervalued. I sold them at the end of June when they were at 152p so made a tidy profit. Since then they have continued going up and up (now at 292p). I bought Lasmo at 243p in place of Telewest and have lost all the money I made on the Telewest. Dumb or what?

BH, Kent

The Fool responds: This looks like a classic example of following, but then discarding the old adage "buy what you know". The Telewest investment, in a sector that you are familiar, was a beauty. I doubt if you've got the same knowledge of the oil industry, and you paid the price.

Ninety per cent of unit trust managers underperform the market average (your comment 18 April). So why are they paid so much?

SM, Huddersfield

Excellent question. They have vast experience, good contacts, a thorough understanding of ratio analysis and know about risk factors. There is probably a scarcity of these people, hence their inflated salaries. However, as we can see, despite the pay and their so-called expertise, most of them fail to beat the returns of the index. Unit trust managers are ultimately paid by the people who invest in the fund. That is where a good chunk of your 5 per cent initial charge and the annual management fee goes.

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