Warren Buffett Reveals: How to Legally Steal

money

Life isn’t fair.

When you did something wrong, you got into trouble. But when the teacher’s pet did something wrong, she got away with it.

When you busted your butt in college, you got a $15 per hour job for all your hard work. But when the rich kid slacked off all the way to graduation, he got hooked up with a six-figure job.

When you worked hard and paid your dues, you got diddly-squat. But the lazy, two-faced boss got all the credit.

Few people complain in a meritocracy. If everyone’s reward was based upon how well he performed, that’s fine. But you don’t live in a meritocracy.

That is why the US government shuts down and still gets paid.

That is why CEOs could tank a company and still get $300,000 a day in severance.

That is why bankers got lavish bonuses during the 2008 Great Recession (funded by taxpayer money), but regular Joes got kicked out of their houses.

But that’s not the worst of it.

Wall Street legally steals 20% of what Main Street makes — by charging a hefty fee to “help” you, while providing minimal value in reality. (Some may even argue that the value is negative, especially if you take the economic crashes and bailout money into account.)

Warren Buffett explains what Wall Street does, in his annual report (with my emphasis in bold) …

Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family — generation after generation — becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.

But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers — for a fee, of course — obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new “beat-my-brother” game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager — yes, us — and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family’s disappointment grows. Each of its members is now employing professionals. Yet overall, the group’s finances have taken a turn for the worse. The solution? More help, of course.

It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group — we’ll call them the hyper-Helpers — appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers — brokers, managers, consultants — are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments — in addition to stiff fixed fees — are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners — if they all just stayed in their rocking chairs — 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 — and large fixed fees to boot — when the Helpers are dumb or unlucky (or occasionally crooked).

A sufficient number of arrangements like this — heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so — may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.

So if you wanna get rich … by stealing legally from hard-working folks, work on Wall Street. Take credit when the stock markets go up. Blame someone else when the stock market goes down. Make money for yourself, regardless if you make money for your clients. Show off your yacht, but shrug when asked where are the customers’ yachts. And if somehow you blow up the economy, ask daddy government to bail you out.

This is called a win-win scenario … for you: heads you win, tails you win some more.

The pickpockets and muggers got nothing on the executives in pinstriped suits.

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Comments

  1. Sticking to your guns is the best thing for someone who has some rocks. These helpers are only there to take their clients money and then charge huge load fees! Its all a game!

  2. Man…I wonder if the same things happens all over the world.

    Thieves and more thieves everywhere.

  3. Jeremy Truvilion says:

    -Alex Ding

    Damn man you went in and dissected cooperate America, lol. Basically if you want to make someone less richer you work for them. Its as simple as that. At the same time its probably miserable. I know from experience with last job I ever had, lol.

    • Jeremy,

      For people who produce a whole lotta value, working for someone else is definitely not the way to go. It is usually miserable. And your employer will pay you less than you’re worth.

Trackbacks

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