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Berkshire Hathaway Inc. Message Board

  • frootloop885 frootloop885 May 13, 2005 10:15 AM Flag

    Dreman Expenses Revisited

    If the Dreman fund's annual return over the next decade is 5% a year which is roughly what I would expect from the overall market. And your expense ratio is 1.5% you will pay the fund about 33% of your profits! (1.5% from your 5% total return, leaving a total annual gain of 3.5%) But fees don't really matter, and anyway I'm certain Mr. Dreman will easily outperform the market by 35-40% and earn his keep! P.S. To see just how difficult that would be please grab a copy of "Winning The Losers Game" by Dr. Charles D. Ellis and start reading. - Cheers

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    • Please HC give us more picks!

    • HC I'm still waiting for my apology. When you're right you're right!

    • Buffett works for the equivalent of about 7 cents per A share. It is absurd. I say we should raise his salary to at least 25 cents per share. Aw, hell, let's go nuts and pay him 50 cents per share.

    • <I think I'll stick with Mr. Buffett and Mr. Munger they almost work for free. ;)thank you have a nice day!>
      And they are better money managers to boot!

    • Market returns of 5% a year for the next decade? Is this possible and why 1.5% is too much to pay your fund manager...
      Economist Robert Shiller, in his book Irrational Exuberance, analyzed the relationships between the P/E ratio of the S&P500 and future returns of those stocks. Using historical data, he tracked a strategy that invested in January of a given year and then held for ten years. For years in which the P/E of the S&P500 was higher than 20, the ensuing ten years typically showed very low annual compound returns. In fact, of the 16 years in which the P/E was higher than 20, only two of these 16 purchases would have enjoyed a compound, real return of more than 5%--and even these two showed returns of only a little more than 5%. At the same time, buying when the P/E was lower than 10 produced real returns in excess of 5% in all 16 years in which that strategy would have purchased stocks. Half of these ten year low P/E buys would have had real returns higher than 10%. Of course this time might be different, maybe P/E's have reached a permanently high plateau. But If your fund charges an expense ratio of 1.5% in a 5% return enviornment the chances of outperforming the market are astronomical. The fund must beat the market by 30% a year, just to cover expenses! I think I'll stick with Mr. Buffett and Mr. Munger they almost work for free. ;)thank you have a nice day!

    • Well, unfortunately my boss never quit hassling me, and (not surprisingly) I never got my work done. So on with the posting... albeit a day and 150 posts later!

      Ok, first about your question of market performance.

      You postulate that the market will return 5% over the next few years. Fine. That's certainly possible. I think it's more likely to be different than that, but no more likely to be any other particular number than 5%.

      You asked whether I think P/E's will go higher. I don't. I think there's an equal chance of them going either way, and it's anyone's guess what people will be willing to pay for stocks next year and the year after that. I would be willing to say that P/E's will definitely change at some point. The market has historically grown at 7-8% per year over just about any 20 year period you'd pick, so I'd guess that's a more likely long-term return than 5%. Near-term, like 3-5 years, though is really anyone's guess. It could be 8% or it could be 2%, who knows? I'd bet that it will be positive after 5 years though.

      Will interest rates go down? Sure, after they're done going up! We're in a rising interest rate environment, there's no doubt about it... every time the fed meets, they raise the rates by 0.25% and will continue to do so until we're at 5%, at least. Who knows what'll happen after that? What'll it do to the stock market? Probably lower the return over the short-term, thus putting the odds of your 5% closer to reality than the historical average. Maybe not though. When they decide to quit raising rates, they could drop again, and who knows, maybe we'll get another stock bubble in 2009?

      We are in a historically low interest rate period, and I think long-term higher rates will prevail:

      Probably that means that we're due for somewhat lower P/E's in the future. When? Who knows?

      Regardless, stocks paying a good dividend and carefully selected for value should continue to perform over multiple-year periods, and hopefully DCS manages its portfolio so that it can continue to perform, and continue a strong payout of 6-7% each year, while increasing it's portfolio value. That's why DCS holders pay the 2% fee to Dreman, and as long as he manages to do that, we're happy to pay it. I don't think the stocks he's picked are a bad basket of choices at all. As long as the world keeps smoking, and the trial lawyer hyenas don't manange to bring down a tobacco elephant, then MO, UST, RAI and the rest should do just fine. As far as FRE and FNM, that's a little more risky, in my opinion, but I trust that Dreman has scoped it out well enough (that's why he gets the big bucks) and would cut and run from these positions if necessary. I don't think it's all that likely that we'll have such a derivate catastrophe as some predict with these though. Yeah, home prices could drop, but so could anything else, and these banks writing the mortgages aren't stupid. They'll find a way to keep their money or even profit, even in the face of market panic.

      At any rate, you could have done worse than by holding DCS this past year:

    • You need to go back to school for grammer pal and the other 30 shills are no better than the whore your investing in (here)!

    • "Doesn't say anything more than that the poster has 83 different aliases with Yahoo."

      delusional paranoia

    • Doesn't say anything more than that the poster has 27 different aliases with Yahoo.

    • We are exactly at the same point as Jan. 04. What a long strange trip it's been.
      If people want action, I suggest they go somewhere else.

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