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Warren Buffett on Opinions

In this segment of The Motley Fool's financials-focused show, Where the Money Is, banking analyst David Hanson is joined by Motley Fool One analyst Morgan Housel to search Twitter for some hidden insights. Morgan tells viewers why pundits make so many predictions.

Full segment transcript below.


David Hanson: All right, moving on to the final segment, on the Twittersphere. Closing it out with our first tweet here, it's about Buffett from Shane Parrish at @farnamstreet: "It's a terrible mistake to think you have to have an opinion on everything." That is, of course, from Warren Buffett. Do you have an opinion on everything?

Morgan Housel: I don't. I have an opinion on very, very few things, and I think the way the media works today, with Twitter, where we got that from, the 24/7 news cycle, analysts and journalists and pundits are expected to have immediate reaction and analysis on everything regardless of how trivial the news is, and I just think that does a big disservice to viewers and readers. I think it's not only OK, but it's a good thing to say, "I don't know. I don't have enough information on this. It's not you, it's not relevant to me, it's not a valid to me."

There's so much more news today than there was 20 years ago. So I always talk about, 20 years ago, you had The Wall Street Journal, you had Louis Rukeyser, and that was pretty much it. You had some obscure newsletters, but today, you have CNBC and Business Insider and Twitter and CNN Money, and there's so many different news outlets. But what's changed the last 20 years is not the volume of meaningful stuff going on -- it's just the volume of news coming out of it because that you really need to push a lot of it to the side.

David: Yeah, I agree, and we mentioned Janet Yellen at the beginning of the show before we started filming said, "I wish -- we have to mention it because it's news -- but I don't want to have an opinion on it." It's kind of, she's a smart woman, she has great experiences, that's my opinion, I don't think it's good or bad.

Morgan: My analysis is. Let's see what happens. We really don't know what's going to happen.

David: Exactly. All right, moving on to the next tweet, we've got... it's about some hedge funds from Stanley Pignal, he says "95% of hedge funds have underperformed the S&P 500 so far this year (Source: Goldman Sachs)." Interesting.

Not that surprising to me.

Morgan: One rebuttal here could be that not every hedge fund should be benchmarked to the S&P 500, but it's a pretty good benchmark and we know that a lot of them should basically be benchmarked to the S&P, and the fact that so many are underperforming shows two things. One is that, I think I mentioned this in a show of several weeks ago, there are now more hedge funds in the United States than there are Taco Bells. It's just a very, very crowded space. Whereas 30 years ago, there were 200 or  300. And back then, you could really exploit opportunities if you're a good professional investor and you could really go out and earn some good returns.

There's so much competition in the space now that hedge funds just really have a hard time generating good returns, and on top of that, the fees that they charge are just outrageous. The standard hedge fund fee is 2% of assets plus 20% of the profits. There are some top-notch hedge funds that can get that, can earn that, but when that just goes down the chain and every hedge fund regardless of performance is charging that, you just get terrible returns. So where do these profits come out of? The biggest investors in hedge funds are pension funds, 401(k)s, and so it's really coming out of people's pockets and going straight into hedge fund manager's.

David: It's easy to kick the hedge funds when they're down, and I am certainly not advocating people to go out and put their money in just any old hedge fund, but I think it also highlights that we've heard so many "smart money people" saying, "I have so much cash on the sidelines." I think that's probably the biggest drag of performance -- not the fact that they're going out and investing in J.C. Penney and losing all their money.

I think it is the fact that they have cash, where the market is up 16% this year and you have a lot of cash on the sidelines, that can hold it back so I'm not going to say they're all bad, but I think if we did have a market downturn, that's when you could potentially see them outperform.

Morgan: My rebuttal is in 2008 when we did have a big market downturn, hedge funds whose job it was to manage risk and hedge did not hedge. A lot of them, most of them, lost a tremendous amount.

David: I'm trying to defend the billionaries, Morgan. C'mon, they need a break. All right, moving on to the final tweet, from Josh Brown. He says, "Every year I learned to pay attention to less things. It costs me nothing." Less things, is that the way to go?

Morgan: It's actually "fewer" things. Several people pointed that out to Josh, but we'll give him a pass. This sort of goes back to the tweet that we were talking about with news. It's really there's so much information out there, and you don't need to feel that you need to soak all of it up. I think the most important thing you can do if you're reading financial news is figure out what to tune out and what not to pay attention to.

Just because someone wrote a news article about something or has an opinion about something, does not mean it's relevant to you. There's a great quote by an old economist. He says, "Pundits forecast, not because they know, because they are asked." I think that just sums up so much of the media today.

David: Well, I'm not going to ask you to forecast anymore. That's our show for today. I'll be back here tomorrow with Stock Advisor analyst Brendan Matthews. We'll be talking some insurance, some Berkshire, and some more. We'll see you then.

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Morgan Housel

Morgan Housel is an economics and finance columnist for Analyst, Motley Fool One. More Articles

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