Buffett: The Truth About Asset Allocation Models - YouTube

WARREN BUFFETT: Yeah, we think the best way to minimize risk is to think.

(Laughter)

And the idea that you have — you know, you say,  

“I’ve got 60 percent in stocks  and 40 percent in bonds,”

and then have a big announcement,  now we’re moving it to 65/35, 

as some strategists or whatever  they call them in Wall Street do.

I mean, that has to be pure nonsense. I mean,

60/40 or 65/30 — it just doesn’t make any sense.

What you ought to do is have — your default  position is always short-term instruments.

And whenever you see anything  intelligent to do, you should do it.

And you shouldn’t be trying to  match up with some goal like that.

I found it entertaining — I was just reading  yesterday in an article, I think it was,

about the two fellows at Google

and all of the problems they’re going to  

have because they’re each going  to get a few billion dollars.

I mean, it was — I want to send a sympathy card.

I almost went down to Hallmark  store because this article went on —

they’ve got this terrible problem and that terrible and they’re going to need lawyers,

and they’re going to need financial  — they don’t need anybody.

Those guys are smarter than the  people that are coming to them. 

And they do not have a big problem,

and they are very capable of thinking it through themselves.

The people that have the problem are the  people who want to sell their services to them

and are going to have to convince  them that they have a problem.

But so much of what you see when you talk about asset allocation —

it’s just merchandising.

It’s a way to make you think that if you don’t  

know how to determine whether  it should be 60/40 or 65/35,

that you need these people. And you  don’t need them at all in investing.

Most of the professionals that  

tell you that you’re going to get in  great trouble unless you listen to them

and sign up for their services, you  know, they’re good at selling, but —

It’s what my brother-in-law — former brother-in-law — that 

worked at the stockyards used to say was that  people would bring in cattle or something.

And I’d say to him, you know,

“How do get the farmer to employ you  to sell to Swift or Armour or Cudahy

instead of the guy right next to you.  I mean, you know, a cow is a cow and

Armour’s going to buy it the same way.”

And he gave me this disgusted look and he said, “Warren,

it’s not how you sell them, it’s how you tell them.”

Well, there’s a lot of that in Wall Street.

Charlie?

CHARLIE MUNGER: Yeah, people have always  had this craving to know the future.

You know, the king used to  hire the magician or the  

forecaster and he’d look in  sheep guts or something for

an answer as to how to handle the next war.

And so there’s always been a market for people who

purported to know the future  based on their expertise.

And there’s a lot of that still  going on. It’s just as crazy

as when the king was hiring the  forecaster who looked at the sheep guts.

And people have an economic  incentive to sell some nostrum.

It can be sold over and over and over again.

The really interesting figures  are when you combine the 

underperformance of the market,  say, by the mutual fund industry,

which is probably a couple of points per annum.

And that understates it.

Now, if you take all of the

investors in the mutual funds who are constantly  whipsawing from one fund to another

by a bunch of brokers who want commissions,

now you take a sub-normal performance and it  goes on another three or four percentages points

due to the shuffling of the  mutual fund investments.

So the poor guy in the general public

is getting a terrible result  from contacting the experts.

And these guys are hitting the Scout troop  and the Community Chest drive and are  

locally reputable people.

I think it’s disgusting.

It’s much better to make a living by  being part of system that delivers value

to the people who are buying the product.

But nobody refrains from creating gambling  casinos or something, on my theory.

If it’ll work to make money, why,  we tend to do it in this country.