Financial analysts of the world unite

I know that some of you cannot go to the link which is behind the paywall, but in this case you might think about ways to read the whole article. Head off to some coffee shop or the local library. Perhaps even shell out the $3.00. But this is what you should read, which comes with a title that provides you with little sense of what comes next: Piano’s not the key to wealth. I might also mention that the article might also depress you unless you are in on the scam scheme yourself.

The best pianists, for all their thousands of hours of practice and performances, will earn crumbs compared to even second-tier fund managers. The salaries of the best doctors and barristers’ incomes are dwarfed those of money managers.

That’s because they are labourers, and labour is relatively cheap. Siphoning off a portion of capital income is real money.

And in no country is this truer than Australia, where regulation ensures $30bn flows into superannuation accounts every three months. Indeed, whoever wins the federal election will supercharge that flow as the compulsory rate of saving cranks up to 12 per cent by the mid-2020s. Labor, in one of the greatest transfers of wealth ever, wants a 15 per cent rate.

All this and more are from Adam Creighton’s visit to Omaha to listen to Warren Buffett and discuss money management with a number of the 18,000 who showed up to listen to what he had to say. There is then also this:

In advice to budding financiers, Buffett revealed the second and main swing favour of asset management: don’t become a good analyst, be a salesman. At 1.5 per cent a year, you’ll quickly be rich. The wonders of pay based on percentages can’t be oversold, especially in a world where financial assets are swelling faster than inflation and the population together. Managing $1bn entails no more labour than $10m but, for a fee of 1 per cent a year, the pay differs.

The best pianists, for all their thousands of hours of practice and performances, will earn crumbs compared to even second-tier fund managers. The salaries of the best doctors and barristers’ incomes are dwarfed those of money managers.

That’s because they are labourers, and labour is relatively cheap. Siphoning off a portion of capital income is real money.

And in no country is this truer than Australia, where regulation ensures $30bn flows into superannuation accounts every three months. Indeed, whoever wins the federal election will supercharge that flow as the compulsory rate of saving cranks up to 12 per cent by the mid-2020s. Labor, in one of the greatest transfers of wealth ever, wants a 15 per cent rate.

As wages stagnate and asset prices soar, the division of jobs between those who rely on wages and those whose “wages” entail a hefty chunk of capital income raises questions about the fairness of the tax system.

I’m as against Labor’s proposed interference in childcare wages as the next furious pundit. It is already a bottomless pit of public spending and any extra will be hoovered up by childcare centres. The proposal does nothing to unbutton the straitjacket on workers’ productivity imposed by Labor’s “quality framework”, which mandated maximum child-to-carer ratios among other feel-good imposts that abolished affordable childcare.

The last paras:

Regulation tends to benefit the better off, as it did in Omaha, where low-income Uber and Lyft drivers did a roaring trade. But too bad for them a federal rule in response to Nebraska floods outlawed “gouging” of consumers in emergencies. Without surge pricing, Omaha’s rich visitors enjoyed cheap $US7 rides between high-end hotels and bars.

“Why are you poorer than Warren?” Munger [the $2 billion dollar man] was asked.

“Well, why was Albert Einstein so much poorer than me?” he mused, after a long pause. Becoming a scientist is also a bad idea.

You have now read around a third, so you can decide whether to spend the $3. Nevertheless, it might be the best career advice you ever get. Still, I would rather be Albert Einstein than Warren Buffett, but that’s just me.

A few scattered thoughts and questions

On Wednesday this week there was a small article on the editorial page of the AFR under the heading, “Sell Assets and Spend up Big”.

I wouldn’t normally have paid much attention to it except that it’s by Tony Shepherd who is about to head up the Commission of Audit. The headline is not a bad summary of the contents so let me do a bit of a review.

Governments and business and community leaders are increasingly united in recognising the merits of selling publicly owned assets to unlock funding for badly needed new infrastructure.

Here’s the problem which I will start with a question. How does the sale of assets translate into an addition to our resource base to allow us to undertake these projects? Looking separately at the financial side and the real resources side allows plenty of room for conceptual misjudgment. Sell up Medibank and Medibank is still there and operating. What resources have now been freed up? The Government now has more money to spend but has this sale increased the real level of national savings? I don’t see it but am willing to be convinced. But what must be done is to demonstrate that wherever these resources come from they are not crowding out other even more urgently needed and value adding investments. Selling assets won’t ensure that in any way.

Contributing to a rethinking of privatisation is the opportunity to draw on superannuation funds as an alternative source of infrastructure investment.

Those superannuation funds are not presently idle. They are not just sitting around doing nothing. They are invested somewhere, in whatever places the various trustees see as the place where the highest returns can be found. What will be different now? How will these funds become available to governments? What will happen to the projects that are currently being funded by superannuation? There is nothing new here, and if the government is in any way intending to divert these funds using some kind of guarantee or what will appear to provide a more certain monetary return, we are going to see our resources being used less efficiently and our growth rates diminish. Infrastructure is not a magic word that guarantees the money will provide a positive return or the resources used productively. See the NBN for a reality check.

The private sector can shoulder the lion’s share but governments will continue to have a substantial funding role when it comes to non-commercial or social projects.

There’s no doubt about that. No business will go anywhere near this kind of thing. The one certain province for governments is to invest in loss making projects. They do it all the time whether they intend it or not. But if it is loss making then it is slowing the economy and lowering our living standards. There may be equity and other considerations but do not confuse any of these with economic growth. This is four percent of GDP we are talking about, $760 billion on their own reckoning. Bad news to start wasting so much on government projects with no positive return.

We should be seeing a virtuous circle where governments funds get good projects started and, once the asset is mature, it is then sold.

Whatever this is, virtuous is not the word I would use. Governments have NO ability at picking value adding projects, none whatsoever. Before you start on something new, give us the list of previous projects, over the past fifty years let us say, where government money has built some kind of value adding profitable investment. There is no history this side of the Snowy River which may well have been done by the private sector had it been given the opportunity. Governments should never be allowed to choose projects and where they do they should start by admitting that the project will never be profitable but is being done for some other reason. Governments should stick to national defence and road building. Maybe schools and hospitals, maybe. But for the rest, they should leave alone. They have no history of getting it right and there is no reason to think this will change and every reason to think they will get it wrong.

Governments should be encouraging more private investment in green field projects by properly dealing with the problem of early market risk. There are ways to use the government balance sheet to do this.

Danger, danger, danger! The way to deal with early market risk is to leave it to the market. It is the only way. Every business would love to have its risks covered by some kind of government bail-out guarantee. That is the certain way to end up with sub-optimal projects, misdirected investment, slower growth and lower living standards.

But in the end, this is only one man’s view although it is the particular man who will be chairing the Commission of Audit. Hopefully by the time he has come to the end of this process and released his report he will see things in a completely different way.