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Buffett Advises Investors To Be Cautious With Wall Street Traders

Legendary investor Warren Buffett has said that investors lose by trusting their money to Wall Street investment managers in his yearly letter and once again reiterated his long held beliefs that paying investment fees to traders was not something he encouraged.

In his annual letter to shareholders of Berkshire Hathaway Inc., the billionaire investor said that he had won a $1 million bet made a decade ago with an asset manager that a low-cost index fund would do better than a specified set of hedge funds in a 10 year timeframe.

In a statement Buffett said,

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. Both large and small investors should stick with low-cost index funds.

Buffet’s advice is gaining widespread acceptance in recent years with hedge funds now seeing waning of interest from institutional investors like pension funds and endowments due to years of underperformance. Index funds on the other hand have been picking up.

Bloomberg

In 2016 alone, passively-managed funds saw fresh investment of $504.8 billion, while actively-managed funds experienced redemptions worth $340.1 billion, according to data from brokerage Morningstar Inc. In January 2017, the value of assets managed by Vanguard reach a record level of $4 trillion.

Buffet said in his letter that investors have wasted over $100 billion in the past decade on costly advice. According to him, only a handful of investment professionals have the ability to beat the market.

For his bet, Buffet had chosen Vanguard 500 Index Fund Admiral Shares as the index fund that would outperform hedge funds over the next decade. Protégé Partners, the asset manager on the other side of the bet chose five funds comprising a collection of hedge funds. These funds typically charge additional fees over and above that charged by each one of the hedge funds.

The selected hedge funds have posted compounded annual returns of 2.2 percent in the past nine years while the Vanguard index fund has shown a return of 7.1 percent. Buffet has estimated that nearly 60 percent of gains delivered by the hedge funds are eliminated by management fees.

It is expected that Buffet will mostly probably win the bet when it concludes on Dec. 31. The bet proceeds will go to a charity selected by the winner.

In his letter Buffet praised Jack Bogle, the founder of Vanguard Group, an investment firm that focusses on funds with passive investing strategies and called him a hero for American investors.


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