A simple lesson from Warren Buffett for the mutual fund investors

Warren Buffett, arguably the greatest investor the world has ever seen,  wants the companies he invests in to pay him regular dividends, his company, Berkshire Hathaway, does not pay dividends to the shareholders. Can one blame him of employing double standards?

There is an interesting lesson for mutual fund investors here ...

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The English translation is as under:

A simple lesson from Warren Buffett for the mutual fund investors

Warren Buffett is arguably the greatest investor the world has ever seen. Many have studied his investment philosophy and investment strategies in depth. There are many interesting facts about him.

One of the important aspects of his investing philosophy is that he insists that the companies he has invested in should pay dividend to the shareholders whenever possible. The last two words “whenever possible” do not mean “whenever the management thinks right”, the words mean  “whenever the company has surplus available for dividends”. While he wants the companies he invests in to pay him regular dividends, his company, Berkshire Hathaway, does not pay dividends to the shareholders.

Can one blame him of employing double standards? Well, in order to answer this question, we must understand his way of thinking.

According to Warren Buffett, he is one of the best “capital allocators” in the world. He understands how to allocate capital in a manner that the risk of loss is least, whereas there could be reasonable upside, too. That makes him the best investor that he is. Not many are blessed with such capabilities and few know what they are best at.

When he invests in companies, he wants the management to return the excess capital to the shareholders. He knows and strongly believes that between him and the company management, he can invest the money better.

Now let us look at the other side – the investors who have bought shares in Mr. Buffett’s company, Berkshire Hathaway. The firm is an investment company or a holding company that invests in other businesses and generates investment returns through better capital allocation. He does not pay dividends to the shareholders as he believes that the allocation of funds can be better done by him and his partner, Charlie Munger as compared to the shareholders. In fact, if the Berkshire shareholders were better investors, why did they invest their money in an investment company? They also know what Mr. Buffett believes – Mr. Buffett and Mr. Munget are far superior investors than these investors themselves.

So, what is the lesson for investors in mutual funds?

Please understand the difference between investing in a company’s business and giving money to a mutual fund manager to do that job. While in the first case, you are the investor, in the latter case, you are taking professional help for the same. That means, when a company makes profits and has no need for funds for deployment in the business, the management would pay dividend. However, if the fund manager pays dividend, what does the investor do with the same?

If you are anyway going to invest the money somewhere else, why not allow the fund manager to do it?

Think about it.

-       Amit Trivedi