1. He agreed to make up any losses plus 6% compounded per year before earning that 25%. So if he lost 10% one year he’d have to gain back like 16.~% before making any money the next year.
2. He had his own money on the line, invested with his partners, so if they lost money so did he.
3. His salary from Berkshire is $100,000 per year or something very close to that (I forgot, read all the letters if you want to know) – that’s a pittance for a CEO of an almost $200 Billion public company.

Thanks for trying, though.

Does he not make a salary as CEO of Berkshire Hathaway in which he acts as a middleman between his shareholders and the companies that Berkshire Hathaway invests and/or buys?

Warren’s analogy is quite correct in one sense, but flawed in another.

Take the startup world. Most entrepreneurs are not wealthy enough to fund their own companies. They need access to someone else’s capital. However, there are very few individuals or organizations that would write $5 million checks to people with ideas. Thus the Venture Capital industry was born. VCs act as middlemen between the limited partners (LPs) with the dough, and the entrepreneurs who need it to start their companies.

While I agree that intermediaries add little value, there is no better way to allocate money.

On the other hand, Warren’s argument is spot on when it comes to hedge funds, who focus solely on the zero-sum game of trading public securities.

By definition, for every hedged trade that delivers a profit to the LPs, someone else is losing the equivalent amount of money. In this case, Warren’s analogy is 100% correct. We would all be better off with passive index investing.