{"id":19853,"date":"2023-09-10T11:56:00","date_gmt":"2023-09-10T03:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=19853"},"modified":"2024-07-12T17:43:47","modified_gmt":"2024-07-12T09:43:47","slug":"poor-investment-returns","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/","title":{"rendered":"Some Reasons Buffett Thinks about Poor Investment Returns"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Source_of_this_article\" >Source of this article<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#The_reward_of_listed_companies_and_investors_is_opposite\" >The reward of listed companies and investors is opposite<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Three_primary_cause\" >Three primary cause<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Frictional_costs\" >Frictional costs<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Excitement_and_expenses_are_enemies\" >Excitement and expenses are enemies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Frictional_costs_eat_up_investors_rewards\" >Frictional costs eat up investors&#8217; rewards<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Reward_is_inversely_proportional_to_activity_level\" >Reward is inversely proportional to activity level<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/09\/10\/poor-investment-returns\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Source_of_this_article\"><\/span>Source of this article<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In his <a href=\"https:\/\/berkshirehathaway.com\/letters\/2004ltr.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">2004 shareholder letter<\/a> (the part in italics in this article), Buffett listed some of the main reasons for poor investment returns.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"The_reward_of_listed_companies_and_investors_is_opposite\"><\/span>The reward of listed companies and investors is opposite<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Three_primary_cause\"><\/span>Three primary cause<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>There have been three primary causes: <\/em><\/p>\n\n\n\n<p><em>first, high costs, usually because investors traded excessively or spent far too much on investment management; <\/em><\/p>\n\n\n\n<p>S<em>econd, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and <\/em><\/p>\n\n\n\n<p><em>Third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long underway) and exits (after periods of stagnation or decline). <\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Frictional_costs\"><\/span>Frictional costs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Excitement_and_expenses_are_enemies\"><\/span>Excitement and expenses are enemies<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><em>Investors should remember that excitement and expenses are their enemies. And<br>if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.<\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Frictional_costs_eat_up_investors_rewards\"><\/span>Frictional costs eat up investors&#8217; rewards<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In the <a href=\"https:\/\/berkshirehathaway.com\/letters\/2005ltr.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">2005 shareholder letter<\/a>, Buffett wrote a very long story to explain how frictional costs eat up investors&#8217; returns; I will not repeat the story in the letter here. After telling this story, Buffett gave the following three paragraphs (in  italics) of conclusions about frictional costs.<\/p>\n\n\n\n<p><em>Indeed, owners must earn less than their businesses earn because of \u201cfrictional\u201d costs. And that\u2019s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.<\/em><\/p>\n\n\n\n<p><em>And that\u2019s where we are today: A record portion of the earnings that would go in their entirety to owners \u2013 if they all just stayed in their rocking chairs \u2013 is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses \u2013 and large fixed fees to boot \u2013 when the Helpers are dumb or unlucky (or occasionally crooked).<\/em><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reward_is_inversely_proportional_to_activity_level\"><\/span>Reward is inversely proportional to activity level<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><em><strong>For investors as a whole, returns decrease as motion increases.<\/strong><\/em><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"171\" height=\"117\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2023\/05\/pr-1600x1200-1.jpg\" alt=\"Poor Investment Returns\" class=\"wp-image-19855\"\/><figcaption class=\"wp-element-caption\">credit: fool.com<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li> <span style=\"font-size: revert;\">&#8220;<\/span><a style=\"font-size: revert;\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/06\/most-investors-problem-is-concepts-and-psychology-not-stock-selection\/\">Most investors&#8217; problem is concepts and psychology, not stock selection<\/a><span style=\"font-size: revert;\">&#8220;<\/span><\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/29\/misunderstanding-of-price-and-value\/\" target=\"_blank\" rel=\"noreferrer noopener\">Misunderstanding of price and value<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/21\/why-long-term-investment\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why long-term investment is better?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/10\/27\/why-is-portfolio-rebalancing-unreasonable\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why is portfolio rebalancing unreasonable<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/08\/18\/why-concentrated-investment\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why concentrated investment?<\/a>&#8220;<\/li>\n\n\n\n<li> &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/07\/01\/investing-many-years-and-never-make-money-what-should-i-do\/\">Investing many years and never make money, what should I do?<\/a>&#8221; 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wrong investment concept not worth trying at all<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em>Disclaimer<\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Buffett listed some of the main reasons for poor investment returns.<\/p>\n","protected":false},"author":1,"featured_media":19855,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-19853","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buffett"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/19853","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=19853"}],"version-history":[{"count":10,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/19853\/revisions"}],"predecessor-version":[{"id":19875,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/19853\/revisions\/19875"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/19855"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=19853"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=19853"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=19853"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}