You’ve all heard of the phrase, “Let your money work for you.” If you’ve saved up enough money and amassed sizable savings, you might be thinking: Where should I invest my money? While you can invest in stocks or bonds, another alternative is investing in funds. Funds are typically run by money managers and can be public or private. Different funds have different risk/return proportions and lockup periods where the fund requires you to invest for a minimum amount of time (months or years).
In the laissez-faire world of investments, money goes to its highest bidder – or place with the highest returns. With so many funds projecting 8% to 25% returns, how do you determine which fund to invest in? Technically, there are many criteria you can look at such as track record, risk adjusted returns, upside potential, and collateral. However, the most important principal to finding the right manager is stated eloquently in the Gospel by Matthew:
“For where your treasure is, there your heart will be also.”
The first question you should always ask a money manager: Where do you place your eggs? This will screen out 80% of crap investments in your “world of opportunities”. When money managers hawk their financial wares and ask for your capital, judge them by the placement of their own. Shakespeare had it right when he wrote, “To thine own self be true.” If a manager had ten different funds (or opportunities), you can be sure the he will invest his money in the funds he deems most profitable and secure.
However, having a vested interest in the fund alone is not enough. There are qualifications:
- Do they have a meaningful amount in the fund?
- If so, is it a good percentage of their net worth?
To no surprise, these are qualifications that Warren passes with flying colors. He has more than 99% of his net worth in Berkshire Hathaway, and additionally, many of his family and friends have a significant amount of their net worth in Berkshire. As I’m sure Warren would agree, there is absolutely no reason why – the prospect of doubling his money, getting 40% returns, hubris, or prestige – he would ever be tempted to jeopardize the money that is so important to those he cares most.
This shows why Warren builds a fortress balance sheet that can weather recessions worse than that experienced in 2007-2010. As an insurance company, only Berkshire can insure large policies that no other insurance company in the world can underwrite. When hurricane Katrina, Rita and Wilma struck the Gulf coast they paid out $3.4 billion in losses. While this wasn’t a happy loss (no loss ever is), it wasn’t much of a hiccup for the company.
Now, some of you may not find it in you to ask about other people’s money. Asking about where the money manager invests his funds might make you feel impolite – or even rude. However, if someone is going to manage your money, you have a right to know about “their” affairs – at least to the extent it helps you to make a decision. Part of a good investment relationship is being forthright on both sides of the coin. You can be sure when the money manager qualifies you as an investor, he will ask about your affairs.