As he tipped a few days ago, Warren Buffett has used his latest annual letter to Berkshire Hathaway shareholders to get stuck into active stock pickers and high cost investment managers and advisers, while extolling once again the virtues of passive or index investing.
Buffett devoted a section of the letter (released Saturday) to again explain the benefits low-cost index funds have over most other investments.
He said he estimates that wealthy investors who use high-priced advisers have wasted over $US100 billion over the past decade.
“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients," Buffett wrote.
"Both large and small investors should stick with low-cost index funds." It’s not that investors aren’t ignoring this sort of advice (which Buffett has stated several times in previous letters).
Despite a surging Wall Street with all three major indicies – the Dow, S&P 500 and Nasdaq – hitting a series of new highs – actively managed US mutual funds lost $US342 billion in investor funds last year, their second straight year of outflows.
Passive index funds and exchange-traded funds, meanwhile, attracted nearly $US506 billion of new money.
Buffett again described Jack Bogle, the founder of Vanguard and populariser of low-cost index funds, was his personal “hero”.
“If a statue is ever erected to honour the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Buffett wrote in his letter.
Vanguard now has more than $US4 trillion under management – second only to another passive investment giant in Blackstone.
“For decades, Jack has urged investors to invest in ultra-low-cost index funds,” Buffett wrote.
”In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing — or, as in our bet, less than nothing — of added value.
Buffett, in the annual letter, sharply criticizes hedge funds for charging high fees and urges both small and large investors to stick with low-cost index funds.
“In his early years, Jack was frequently mocked by the investment-management industry,” continued Buffett.
“Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”
And in comments that will echo here in Australia, especially among the clients of banks and other investment groups that have been dudded by poor advice, Buffett attacked consultants and wealth advisers — “hyper-helpers”, — who push rich individuals and institutions away from the use of index funds and into more active trading strategies.
“My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100bn over the past decade,” he wrote.
“Human behaviour won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice.
“Those advisers who cleverly play to this expectation will get very rich,” he said.
"Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine consecutive years.
"Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him,” he wrote.
"Much of the financial damage befell pension funds for public employees. Many of these funds are woefully underfunded, in part because they have suffered a double whammy: poor investment performance accompanied by huge fees.
"The resulting shortfalls in their assets will for decades have to be made up by local taxpayers.” To prove his point, Buffett pointed to his bet 9 years ago that a index fund based on the S&P 500 will outperform a collection of hedge funds over 10 years.
2016 was the 9th year of this $US1 million bet (it ends on December 31 2017). He made the wager with the money managers who own Protege Partners LLC a few months before the recession began in 2008 with both sides picking a charity that would get at least $US1 million.
Buffett’s chosen index fund has recorded an 85.4% gain over than time while the hedge funds delivered an average of 22%.
Looked at another way, the index fund has posted a compounded annual rise of 7.1% versus 2.2% for the five fund-of-funds selected by asset manager Protege Partners.
That means $US1 million invested in the index fund — the Vanguard 500 Index Fund Admiral Shares would have gained $US854,000 so far versus just $US220,000 for the hedge funds.
The proceeds are likely to exceed $1 million because they’ve been invested in Berkshire shares, which have outpaced the market.
Unless the market collapses in the next few months, Buffett has won his bet hands down.
