WARREN BUFFETT AND CHARLES MUNGER

Chairman and vice chairman, Berkshire Hathaway Inc.

Probably the most successful investment duo of the century, Mr. Buffett, 68, and Mr. Munger, 75, believe the basics of investing won’t change — though the basics of investment management could use some changing.

Mr. Buffett: “I don’t think, in terms of investing itself, that technology will have any significant impact on investing. The simple principle of investing is laying out money today to get more money back in the future.

“The keys to that are predicting the stream of payments you are going to get in the future, and deciding at what interest rate to discount them back to a present value. That 50 years ago was the situation, and it will be the situation 50 years from now.

“The information is available faster now. I can ask Debbie (his assistant) to pull out a 10(K) or 10(Q) and we can get it off the Internet in five minutes. Formerly, I might have had to write to companies to get reports. I might have had to reveal my interest to get the same reports.

“But we don’t get better information about businesses than we got many, many years ago. There isn’t that much important information to garner.

“If you are going to evaluate Coca-Cola or Gillette, there is not much additional information you need that was not there 20 years ago or 30 years ago. There is no shortage of information. It’s a question of what you do with it in evaluating it in terms of what cash it’s going to give you in the future.

“If you buy a farm outside of town, or you buy an apartment house, or you buy a service station and you lay out X today, the question is how much more than X do you get back in the future. That’s all there is to investing, and that’s what investment will be about 50 years from now.”

Mr. Munger: “I think the climate in which the process is worked out has changed in the past 30 years. You have had a vast increase in the spread of stock ownership and a vast increase in the percentage of common stock ownership that is managed by professionals.

“And there are a whole lot of people out there who buy because this little piece of paper has gone up in the past, and to the extent that that starts feeding upon itself you can have irrational elements crowding into the investment process. I must say it’s kind of irrational during the days when the mania is widespread. Those aren’t fun periods for us.”

Mr. Buffett: “The Fortune 500, which is a very big percentage of the whole market … earned a little over $334 billion last year. The group, at the end of the year, was selling at $9.9 trillion, probably selling at well over $10 trillion now.

“Now if you have $334 billion in earnings and $10 trillion in market value it’s probably not unreasonable to assume that the $10 trillion is incurring direct or indirect frictional costs of ownership — that’s management fees, commissions, the spreads between the bids and offers, all the sorts of things people take out of the system — of as much as three-quarters of 1%.

“If you take mutual funds, in which a lot of stock money is managed, it’s probably as much as 1.3% or 1.4%. That’s $75 billion out of the $334 billion the Fortune 500 businesses themselves produce. It’s an extraordinary sum. And that’s the difference between the gross return to investors and the net return.

“Charlie and I are not incurring these management costs. Other people are incurring 2%, 2.5%. Get wrap fees in there and 12(b)1 charges and all that sort of thing and it’s up to 3%. Three percent on a $10 trillion valuation is essentially all the earnings of those businesses being eaten up by frictional costs that investors incur.

“That’s why we say expenses are very important. People are investing in a very expensive way and it’s going to take a very big bite out of their net return over a 10- or 20-year period. It hasn’t been noticed so far because some people are getting 20% gross returns and they don’t care if it costs 2% or

not.”

Mr. Munger: “I don’t think very much of the process of being an investment professional. What it means is you are part of a process that sticks the ultimate client for 2% or 3% per annum of the client’s net worth and in the end you haven’t delivered anything of value. I think the investment process in America is a little out of control.”

Mr. Buffett: “The average obstetrician adds something of value for his or her client. Most people would rather have a baby delivered by an obstetrician rather than just picking someone at random off the street. The average dentist does the same thing. The average plumber.

“The average (investment) manager adds nothing. He subtracts something from your performance. It’s almost unique among professions — that the performance of the profession in aggregate takes something off the table and causes the clientele to get a worse result than they would if there were no professionals at all.”