Everybody who sings about one of the best and perhaps smartest businessmen in the world they forget his fees. Warren Buffet charges 25% of the profits as fees from people whose funds he manages. How many people are willing to pay that kind of fees? IN ADVANCE, not 30 years later in retrospect…

Remember the Fortune list has more wealth managers than people whose wealth has been managed. Wealth management always comes at a price – and quite high price. For example a friend structures real estate deals for builders and gets other friends to invest in it.

The return for the investors?

About 14-21% p.a. depending on how the deal is structured and how much risk is borne by whom. He structures rent deals, ownership deals, private equity SPV, sale and lease back of luxury cars, …and he charges a fee based on each transaction. Frankly there is no way how he does transactions where he makes less than 5-7%  – but ensures that the borrower pays less than what he would if he did the deal with a bank. He also makes sure that the lender gets bank+2-3%.

The airwaves and the print media is full of index funds, cost is more important – after all we are all buying in the same market, sounds nice and cliched. Looks good on power-point, but it is absolute shit. Not that such deals are available to every body – each transaction has to be in multiples of Rs. 20 lakhs – so small retail please excuse. His real estate deals have yielded rates ranging from 12% to 35%, his derivative desk generates returns in the region of 20% per annum at least, his equity deals would be far superior to many mutual funds – have not seen his customers crib about what he makes. He recently came to me saying I sold Siemens and bought a house – it had cost him about Rs. 35,00,000 when he invested. He bought a house for Rs. 3 crores – by just selling those shares.

This is what we call selling 2 cats of $ 500 million to buy a dog for $ 1 billion. – Peter Lynch!

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  1. Richness is a state of mind not an amount of money. One of these guys will call his son and ask him to switch off the fan when he is leaving the room. Not that he cannot afford the bill, but sees the futility of wasting electricity, that is all. What I am trying to say is – how many of us would have given money to anybody if he/she had asked for 25% of the profits? May not be many of us, but that is exactly what Warren Buffet charges!

    Just saying cost is important is fine…ultimately it is the competence. Look at Hdfc Top 200 will people run away if they increased the asset management charges by 1%, perhaps no. However while choosing a mutual fund, THE ONLY THING WE CAN REALLY look at is – is there a team and how much are the costs!! Ironic is it not ? :):)

  2. Mutual Funds charge us even though they do not make money for us. WB will charge 25% on the profit and not on funds invested.

  3. In well run funds – for e.g. in Hdfc Top 200 for a few people I know the corpus today comprises of 20% of principal and 80% of profit. If they had paid fees like what WB charges, they would NOT have accumulated so much. A well managed fund is CHEAP AT 2% asset management charges, but a badly managed fund is EXPENSIVE at 2%. There is far too much emphasis on costs, average and too little on performance. Therefore you have stupid articles all over appearing saying that indexing is good. Yes indexing will be good maybe in 10 years time. However given the limitation of our indices and the poor construction of the index, there seems to be a lot of space at the top for well managed equity funds like Top 200, Discovery, Dynamic, Franklin Flexicap, Hdfc Equity,….etc.

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