The real world doesn't allow big annual gains for years on end, Buffett told an estimated 12,000 Berkshire Hathaway Inc. shareholders Saturday at their annual meeting in Omaha.
Buffett, chairman and chief executive of Berkshire, also said many of the nation's large pension funds overestimate what they will earn on their investments and may end up with "significant shortfalls" as they try to pay their retirement obligations.
To a nearly full Civic Auditorium arena with overflow seating in a hall nearby, Buffett and Berkshire Vice Chairman Charlie Munger said people shouldn't expect a 15 percent average annual gain over the long term.
Buffett called that expectation "a dream world."
An average of 6 percent to 7 percent is more realistic, they said, but investment advisers continue to promise returns twice as high or more.
"I think the current scene is obscene," Munger said. "There's too much mania, too much chasing after easy money, too much on the television emphasizing speculation in general."
They also said investors should not put their faith in new-style investment programs -- hedge funds, asset-allocation funds and the like -- which seem to promise higher returns. Hedge and asset-allocation funds are small, specialized investment funds that cater to wealthy individuals.
Buffett said he knows one man who was raising money for a new hedge fund but whose tax returns were more in line with someone who mows lawns for a living.
"It's just astounding to me how willing people are in a bull market to toss money around," Buffett said. "They think it's easy."
Buffett and Munger also complained that many pension-fund managers make overly optimistic investment projections, often predicting returns of 9 percent per year. If a pension fund predicts that it will have low returns, then its affiliated company may have to contribute money to the fund to meet its pension obligations.
Those contributions reduce the company's profits.
But in reality, Buffett said, pension funds likely will earn no more than 6 percent or 7 percent a year. While the difference may seem small, Buffett said, the impact of those unrealistic projections is huge because the companies will have to make up for the shortfalls.
"Pension-fund accounting is drifting into scandal by making these unreasonable assumptions," Munger said.
Some shareholders said they agreed with Buffett's warnings about investment companies making big promises.
"The hype that's been going on the last year or so has been terrible," said shareholder Bill Edstrom of Waterford, Wis.
He said a mutual fund made a pitch for his retirement savings that pointed out an average 17 percent annual gain over about 20 years, but that was an unusual period.
Shareholders Mark and Phyllis Stein of Santa Monica, Calif., said young people, especially, expect to retire at age 30 and make 20 percent a year on their investments.
But is Buffett correct in saying people should lower their investment expectations?
"I think I did that a long time ago," Phyllis Stein said.
Charlestown, Ind., resident Brian Breidenbach, who is a portfolio manager, said he agreed with Buffett's and Munger's remarks on future returns. He said businesses become so large that past performances are difficult to repeat, although few chief executives will admit it.
"Wal-Mart can't grow forever at 15 percent or it becomes the U.S. economy," he said.(c) 2001 Omaha World-Herald
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