2011: How did Buffett and Munger find their first investors?

AUDIENCE MEMBER: — Millard, Dallas, Texas.

Mr. Buffett and Mr. Munger, when you were raising your first investment funds, how did you go about attracting investors, and once you had your first funds and your first investors, how did you go about growing them?

WARREN BUFFETT: Sounds to me like a man that’s about ready to start a hedge fund. (Laughter)

The — in my case, I’d moved back here from New York in March or so of 1956, and a few members of my family said we’d like you to manage our investments just like I did when I was selling securities out here before I went to New York. And I didn’t like being in the securities selling business, partly because if I sold somebody a stock at 20 and it went down to 10, I wanted to buy more, but I couldn’t face the idea of people that had bought at 20 and, based only on confidence in me not because they understood it, and now they were feeling depressed, and it was — it just wasn’t — it wasn’t very satisfactory.

I could not do as well managing money if people were watching every decision as I could if I did it in a room all by myself.

So I just told these seven members of the family — one of them, actually, was my roommate in college and his mother, they came in also — I said, you know, if you’d like to join up in a partnership, I’m not going to tell you what’s going on, but I will tell you that I will be doing with my own money what I’m doing with yours. Later on, I put all my own money in.

And it just was very slow.

A few months later, Graham-Newman, that I’d worked for, was liquidating, and a fellow named Homer Dodge asked Ben Graham what he should do with the money he was getting out of Graham-Newman. He said, “This kid used to work for me and he’s OK.” And so he came out and went in with me.

And another fellow, late in the fall, had seen the notice of partnership formed in some legal paper and he said, “What’s this?” and came in with me. It’s just — we just stumbled along.

And for almost six years, I operated out of my house, no employee. I kept all the books, I filed the tax returns, I, you know, went out and picked up the stocks personally and stuck them in a safe deposit box.

When Charlie came along, I kept chiding him about the fact — I met him in 1959 — and I said, “Law is OK as a hobby, but it’s no place for a man with your intellect to spend his time.” (Laughter)

And, well, I’ll let Charlie take it over from there. (Laughs)

CHARLIE MUNGER: It actually took me a long time to leave what was a family business.

And so any of you who are having a slow time accepting good ideas, why, you should be cheered by my example, because it was some years after you started working on me, and you pounded on me, and I slowly got the point.

WARREN BUFFETT: And he was actually asking about attracting money.

CHARLIE MUNGER: Well, of course, it helps if you conducted yourself in life so that other people trust you. (Laughter)

And then it helps even more if —

WARREN BUFFETT: You can see why I was so slow and he was so fast. (Laughter)

CHARLIE MUNGER: And then it helps even more if other people are right to trust you. So the formula is quite simple. First one, then the other.

WARREN BUFFETT: Unfortunately, with the present fee structure, just attracting money, rather than performing with it, can be enormously lucrative.

So the skill of attracting money may be — at least in the short run, and maybe the intermediate run — it may be a more important quality than the ability to manage money.

But we, neither one of us, ever charged any fixed fee of any kind.

Am I right on that, Charlie?

CHARLIE MUNGER: Well, we stopped taking any significant overrides on other people’s money at very young ages and at very small amounts of net worth.

I wish our example were more common. But I like our compensation practices, too, and they’re spreading slowly.

We get a new company every, what, five years?

WARREN BUFFETT: Yeah.