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March 14, 2006

Berkshire Hathaway Inc.

posted by MR WAVETHEORY at 3/14/2006 11:04:00 AM

Warren Buffett wrote a very interesting vignette in his annual letter about the Helpers and the GotRocks. To provide some background for readers, Warren asks the reader to suppose that all American corporations are owned by a single family. The GotRocks are truly a wealth family. One day, the Helpers take notice and begin to hover around.

Imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks. After paying taxes on dividends, this family -- generation after generation -- becomes richer by the aggregate amount earned by its companies.

Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious

But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers -- for a fee, of course -- obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what.

So the family's annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.

If you don't have time to read the entire post, at least walk away with this. The Fourth Law of Motion as posited by Warren Buffett:

For investors as a whole, returns decrease as motion increases.

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Anonymous Anonymous said...

Not for daytraders! Volatility is our lifeblood, and we can thrive if we stay alert and nimble.

10:23 AM  

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