Dear Mr. Buffett
I heard that you’re going to be airing a cartoon for kids this fall about money management.
I know that you’re a humble guy and that you don’t live extravagantly. But you don’t exactly circulate with Joe the plumber anymore. So I thought I could give you some tips for your cartoon’s curriculum. As a guy living with the masses, I might have a better grasp on what the average person knows and doesn’t know.
Economically, the world is in a bit of a mess—especially the U.S. I know that you’re trying to sort out the next generation, and I fully commend your efforts. You recognize that if financial literacy were a required component of the k-12 curriculum, the average American would be operating at a grade one level. And if everyone was in at least the financial literacy level of middle school, we wouldn’t be in the mess we’re in. So this cartoon isn’t just for kids. I know that. You’re just making it look like it is.
I’m going to jump ahead of the grade 1 and grade 2 financial literacy components here, and offer suggestions for what might equate to a grade 3 part of the curriculum. You might think the average person knows this stuff. And they should. But sadly, we do a disservice to our youth when we don’t teach the most basic concepts of finance in our schools.
1. People are attracted to past investment performance:
Most people, Mr. Buffett, select mutual funds that have recently gone up a lot. I know, I know. You might have trouble believing that many people invest this way, but they do. Despite every study suggesting otherwise, the average person doesn’t realize that the best investment funds in one year are generally tomorrow’s losers. No, this isn’t too obvious for your cartoon. You’ll want to make sure the kids understand this. I can’t tell you how many of my friends say that their advisors have moved them from one fund to the next because their original fund wasn’t performing well. It’s true Mr. Buffett. In the trenches, the average person doesn’t know that the only indicator of long term future performance is having funds with low fees and low turnover. Most advisors don’t know this either.
And Mr. Buffett, the kids need to know that those who try moving from fund to fund generally perform far worse than if they just sat tight with a bunch of diversified low fee funds.
2. Watching stock market television programs can be detrimental to your financial health:
Most people, Mr. Buffett, think that good investors are those who are always keeping up with the latest news. Sensationalistic investment news isn’t helpful. It just tempts you to change investment products and strategies to align yourself with the latest “talking head” on television. People don’t realize that there’s a correlation between activity and lousy performance. Tell the kids that studies show that those who change their investments with regularity don’t generally perform as well as those who just buy and hold. And market television programs can make even the most disciplined investor itch to “do something” to his or her account. Programs like CNBC’s Squawk Box make investing sound like some kind of highly tactical war. You’re the world’s greatest investor Mr. Buffett. Don’t forget to tell the kids that your favourite holding period is “forever” and that your investment strategy “borders on sloth.” My favourite saying of yours is that investment profits transfer from “the active to the patient”. Hyperactive investors don’t tend to make good investors. Convince kids not to watch market based television Mr. Buffett.
3. Financial advisors may have more training than the average person, but that doesn’t make them better investors:
You can finish high school, and you could be selling investment products after fewer than 3 weeks of training. I met one woman who took a weekend investment course paid for by her employer (Toronto Dominion Bank), and she was off to the investment product sales races quickly thereafter. Even grade 3 can’t be completed in just three weeks.
You might want to really focus on this lesson Mr. Buffett, because it’s so counter-intuitive. As your friend John Bogle has proved, as an average, mutual funds sold by investment advisors don’t perform as well as funds bought without an advisor’s assistance. And the average advisor is guilty of selling yesterday’s hot funds—often in time for their period of under-performance. I know that you’re not a big fan of advisors (or ‘helpers’, as you call them) but not everyone understands why—so please don’t miss out on this lesson with the kids Mr. Buffett. Investors need to learn how to select their own funds, or at least recognize if their advisors are about to do something silly. They also need to understand the conflicts of interest within the mutual fund industry, and they should never put their investment advisors on pedestals if they don’t deserve to be on them.
4. The more you pay in fees, the less you make:
Parents often tell their kids that “you get what you pay for” Mr. Buffett. But they don’t realize that it’s the opposite for investment products. The less you pay for financial services, the more money you get to keep. It’s true Mr. Buffett; the average person really doesn’t know this. It should make a pretty big impact coming from your colourful cartoon characters, and if everyone learns how ridiculously high financial service fees generally are, they’ll learn to avoid expensive products—forcing the entire industry to lower its costs for the next generation.
5. Avoid going with the crowd:
There’s safety in numbers Mr. Buffett, but please teach the kids about the unfortunate reputation the lemming has. Many of these rodents meet their deaths during mass migration, where they fall off cliffs or drown—thanks to the “crowd mentality”. Average investors are like lemmings, as you know, Mr. Buffett. Teach the children to avoid lemming-like craziness, because they’ll surely be exposed to it during their lifetimes. They’ll have lemmings in their midst when they regularly hear comments such as these:
“I have to get into a house now, while I still can, because prices are increasing so quickly”. Such statements urge hysterical home purchases, driving up prices that often, eventually tumble.
“It’s a new age. People should be able to sustain annual returns of 15% to 20% in the stock market”
“Stocks haven’t gone up for years. They aren’t a good place for your money”
Most people don’t realize, Mr. Buffett, that when “all the experts” are recommending an investment strategy, it’s best not to follow them. Strong returns, as I hope you tell them, come from making logical decisions that often oppose the exuberance of crowds.
6. Know how to measure success:
Please show the kids how to measure their investment success Mr. Buffett. Many of my fellow trench dwellers give credit or criticism where it isn’t due. “I had a really great advisor in the 1990s” or “I made so much money from 2003 to 2004 by watching a great market television show” might reveal quite a bit of ignorance Mr. Buffett. The kids need to know that when the markets are moving up, most investments will do likewise. So you can’t credit a certain strategy or advisor with working miracles when the overall tide is rising.
Likewise, investors shouldn’t blame a strategy or advisor when the markets are falling—unless their accounts are falling more precipitously than the markets themselves.
You have a challenging task ahead of you Mr. Buffett. I know that you’ll do an excellent, entertaining job, and I look forward to seeing how you present it. And if you want some more basic input from the trenches, I’m more than willing to offer suggestions for the grade 4 curriculum.