Warren Buffett: Here's how Wall Street really makes its money

Warren Buffett said Saturday that Wall Street's real source of wealth is not based on its strong investment acumen, but on something else.

"[There's] far more money made through salesmanship abilities rather than investment abilities," Buffett, Berkshire Hathaway (NYSE: BRK.A)'s chairman and CEO, said at the company's annual shareholders meeting.

Buffett added many hedge fund managers are paid "just to breathe" based on a flawed compensation scheme. He also said high-paid consultants always recommend something other than doing nothing, and benefit from long-term growth of US business.

In turn, Buffett recommended that investors take a more passive approach to investing, noting his long-term bet against Protoge Partners still shows this approach works much better than active management.

It seems so "elementary" but rich, sophisticated people continue to think they can hire people to do better than the market, Buffett also said.

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