

In 1975, Warren Buffet wrote a memo to the Washington Post's CEO Katharine Graham about how to invest the company's pension fund. His advice — to ignore pricey fund-managers, be patient and play the long game — was good enough that the WaPo pension is still in rude health today. Meanwhile, stark assertions like "the rational expectation of assuring above average pension fund management is very close to nil" continue to have relevance today in questions as diverse as whether we need to pay bankers huge bonuses to keep the "best talent" on hand to how you should invest your pension.

For openers, there is one huge, obvious pitfall. I am virtually certain that above-average performance cannot be maintained with large sums of managed money. It is nice to think that $20 billion managed under one roof will produce financial resources which can hire some of the world's most effective investment talent. After all, doesn't the big money at Las Vegas attract the most effective entertainers to its stages? Surely $50 million annually of fees on $20 billion of managed assets will allow an array of industry specialists covering minute-by-minute developments affecting companies within their purview; top-flight economists to study the movement of the tides; and nimble, decisive portfolio managers to translate this wealth of information into appropriate market action.

It just doesn't work that way.

Down the street there is another $20 billion getting the same input. Each such organization has its own group of bridge experts cooperating on identical hands and they all have read the same book and consulted the same computers. Furthermore, you just don't move $20 billion or any significant fraction around easily or inexpensively—particularly not when all eyes tend to be focused on the same current investment problems and opportunities. An increase in funds managed dramatically reduces the number of investment opportunities, since only companies of very large size can be of any real use in filling portfolios. More money means fewer choices—and the restriction of those choices to exactly the same bill of fare offered to others with ravenous financial appetites.

In short, the rational expectation of assuring above average pension fund management is very close to nil.