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My Two Cents


Chris Farrell Jun 29, 2009

I was doing research and I came on a talk given by Charles Munger, the long-time partner of Warren Buffett. I had read the speech given at the University of Californa, Santa Barbara several years ago. It’s a delight to read and think about. On a day that Bernie Madoff got sentenced to 150 years in jail one section stood out: His discussion of “febezzlement.”

Munger calls the fees and other charges imposed by actively managed mutual funds and other investment managers “febezzlement.” (Try and say that fast three times.) In his talk, Munger reminded his audience that the economist John Kenneth Galbraith had come up with the term “bezzle” to describe the outright frauds–think Bernie Madoff and Alan Stanford–that go on for years undetected when markets are strong, only to be revealed during a bear market.

Well, Munger invented the word febezzlement” for the practice of charging high fees during the good times. “I considered the billions of dollars totally wasted in the course of investing common stock portfolios for American owners,” said Munger. “As long as the market keeps going up, the guy who’s wasting all this money doesn’t feel it, because he’s looking at these steadily rising values. And to the guy who is getting the money for investment advice, the money looks like well earned income, when he’s really selling detriment for money, surely the functional equivalent of undisclosed embezzlement.”

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