words from WEB re playing musical chairs...
...Warren Buffett himself has held forth on this issue, using the following words:
If you and I were trading pieces of our business in this room, we could escape
transactional costs because there would be no brokers around to take a bite out
of every trade we made. But in the real world investors have a habit of wanting
to change chairs, or of at least getting advice as to whether they should, and
that costs money--big money. The expenses they bear--I call them frictional
costs--are for a wide range of items. There's the market maker's spread, and
commissions, and sales loads, and 12b-1 fees, and management fees, and
custodial fees, and wrap fees, and even subscriptions to financial publications.
And don't brush these expenses off as irrelevancies. If you were evaluating a
piece of investment real estate, would you not deduct management costs in
figuring your return? Yes, of course--and in exactly the same way, stock market
investors who are figuring their returns must face up to the frictional costs they
bear.
And what do they come to? My estimate is that investors in American stocks
pay out well over $100 billion a year--say, $130 billion--to move around on
those chairs or to buy advice as to whether they should! Perhaps $100 billion of
that relates to the FORTUNE 500. In other words, investors are dissipating
almost a third of everything that the FORTUNE 500 is earning for them--that
$334 billion in 1998--by handing it over to various types of chair-changing and
chair-advisory "helpers." And when that handoff is completed, the investors
who own the 500 are reaping less than a $250 billion return on their $10 trillion
investment. In my view, that's slim pickings. |
