’s Managers

Commentary on Chapter 9

See Benjamin Graham, Benjamin Graham: Memoirs of the Dean of Wall Street, Seymour Chatman, ed. (McGraw Hill, New York, 1996), p. 273, and Janet Lowe, The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend (John Wiley & Sons, New York, 1999), p. 273. As Warren Buffett wrote in his 1996 annual report: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” (See www.berkshirehathaway.

com/1996ar/1996.html.)TILTING THE TABLES When you add up all their handicaps, the wonder is not that so few funds beat the index, but that any do. And yet, some do. What qualities do they have in common? Their managers are the biggest shareholders. The conflict of interest between what’s best for the fund’s managers and what’s best for its investors is mitigated when the managers are among the biggest owners of the fund’s shares. Some firms, like Longleaf Partners, even forbid their employees from owning anything but their own funds. At Longleaf and other firms like Davis and FPA, the managers own so much of the funds that they are likely to manage your money as if it were their own-lowering the odds that they will jack up fees, let the funds swell to gargantuan size, or whack you with a nasty tax bill. A fund’s proxy statement and Statement of Additional Information, both available from the Securities and Exchange Commission through the EDGAR database at www.sec.gov, disclose whether the managers own at least 1% of the fund’s shares.