Last week Steve Pomerantz, CFP interviewed me on his nationally syndicated radio talk show "On The Money!". Here are the highlights:
Steve Pomeranz: So, you started in the brokerage world; you were very, very young, I understand, and you worked for Merrill Lynch... Then you discovered Warren Buffet, I guess, relatively early on. How did that change you?
Frank Byrd: I had been at Merrill Lynch for about three years… I had been the cold-call cowboy. I made 40 cold calls a day for two years. That’s over 11,000 people. That obviously introduced me to a lot of real people. These were typically older investors (because) it takes a while to accumulate wealth. And what I saw had worked for them was that they had bought and held shares of companies that they understood … like a Federal Express, Procter & Gamble, Schering-Plough, Coca-Cola. And having bought several dozens of these over the course of many years – decades – they wake up with, many of them, very large portfolios. I’m talking a million dollars, and that’s in the early 1990s in Memphis, Tennessee, mind you.
So, I knew that that worked. And, to be clear, these weren’t high-income professionals. Many of these were people that had never made over $50,000 a year. So, I knew what worked. I saw it. And, unfortunately, everything I read with the typical Wall Street research didn’t really sit with me because I couldn’t tie it to reality. And one day, accidentally, this broker (my mentor) said, “Hey, I’ll bet you’d like this.” I picked up the Berkshire Hathaway report. I took it home that night, and it changed my life. For the first time, I read something that made sense: Buy shares of great businesses run by great people at good-to-great prices and hold them a long time… That works. I can sell that because it’s the truth...
Steve Pomeranz: So, you went to Columbia because Buffet …well, that was Buffet’s alma mater, and that’s where he worked with Ben Graham and followed the Graham and Dodd philosophies of investing. You actually went right to the source; that’s really pretty commendable…. What are your colleagues saying … now that he’s touting the S&P 500?
Frank Byrd: … This is going to surprise you. Most of my friends – and I am proud to say that I know people that I think of as some of the best in the industry – would tell you that if they were looking over the shoulder of their financial advisor of, say their father … and they saw that that advisor had them in an index fund, most would say, “Whew!”. I think they’d have a sigh of relief. (That’s an) acknowledgment that most of the industry is guilty of closet indexing… (which) basically means that a money manager has a portfolio that is constructed so closely to resemble the index in terms of a large number of companies and very close in terms of mix of industries that, in essence, it basically looks like the index.
Steve Pomeranz: With one major difference and that is the index that you buy costs next to nothing but these people are charging, what?
Frank Byrd: … Roughly in the neighborhood of three quarters of one percent. However, what those numbers often don’t capture is that on top of that, there is a 12b-1 selling fee that is typically another 25 basis points -- or a quarter of a percent. Then there is this hidden cost that nobody talks about: … that’s the enormous tax that high turnover, meaning a lot of buying and selling in a portfolio, extracts from the returns of an account. Now there are several studies on this, and they all reach slightly different conclusions, but the studies, some of them, conclude that the buying and selling friction costs could amount to as much as one percentage point additional drag (on returns).*
… I believe Buffet’s big attraction to the S&P 500 is, at least, he knows it’s low turnover. And that means not just a low management (but) on top of that, the S&P 500 is not engaging in a lot of activity. And that means less friction costs and less taxes….
Frank Byrd: ... Buffet knows active management can work… If you read his written statements carefully, it really focuses on this idea that the typical choice (available) to most people is a large money manager. And (Buffett) is very explicit that size is the enemy of performance… the more money you manage, the worse your returns are going to be… So, he’s not saying that there aren’t some good money managers out there, but it’s typically going to be the small ones. And for the typical person, even professional investor, to be able to identify in advance the small manager, that they can get into – (and who) will have the integrity to remain small, meaning, keep themselves closed to new investors past a certain size – (Buffett) knows that’s not going to happen.
You can listen to the 17-minute interview HERE.
Yours in the field,
* Blanchett, David M. 2007. “The Perils of Portfolio Turnover.” Journal of Indexes, vol. 9, no. 3 (May/June): 34-39.
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