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Warren Buffett Wins His Multi-Million Dollar Long Bet

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    Warren Buffett Wins His Multi-Million Dollar Long Bet

    Here is the story:

    About ten years ago, Buffett said that index funds would beat actively managed funds when performance is measured net of fees. Looks like's been correct.

    Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.

    I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

    Over the decade-long bet, the index fund returned 7.1% compounded annually. Protégé funds returned an average of only 2.2% net of all fees. Buffett had made his point. When looking at returns, fees are often ignored or obscured. And when that money is not re-invested each year with the principal, it can almost never overtake an index fund if you take the long view.
    Linky
    james.c.hendrickson@gmail.com
    202.468.6043

    #2
    Given that the entire market went straight up for the last 10 years, basically since the low in March 2009, Index funds had an advantage there. I don't think the results would be the same if they did another 10 year bet.

    Comment


      #3
      Buffetts point is that, for the majority of people, actively manged hedge funds are no better than index funds...regardless of the time period.
      james.c.hendrickson@gmail.com
      202.468.6043

      Comment


        #4
        Originally posted by MACreditRevo View Post
        Given that the entire market went straight up for the last 10 years, basically since the low in March 2009, Index funds had an advantage there. I don't think the results would be the same if they did another 10 year bet.
        Please keep in mind too that you are looking back at the market now, with the power of hindsight.

        The question is, for the NEXT ten years, do you think there is a hedge fund manager out there that can help you out-pace the market, and do so after the fund's expense ratio and commission costs?

        Comment


          #5
          active fund fees: $$$

          Index fund fees: $

          Comment


            #6
            The drag of a 1% ER is huge over 30 years. And if you have an advisor charging a 1% AUM fee on top of that, you are losing a lot of money to stupid.

            Comment


              #7
              Originally posted by MACreditRevo View Post
              Given that the entire market went straight up for the last 10 years, basically since the low in March 2009, Index funds had an advantage there. I don't think the results would be the same if they did another 10 year bet.
              Wouldn't the market have gone straight up (for the most part) for the actively managed funds, too? Why do you think actively managed funds would be at a disadvantage in an upward market?
              Last edited by Like2Plan; 02-22-2018, 05:12 AM.

              Comment


                #8
                Originally posted by MACreditRevo View Post
                Given that the entire market went straight up for the last 10 years, basically since the low in March 2009, Index funds had an advantage there. I don't think the results would be the same if they did another 10 year bet.
                I'll take that bet any day. Over the long term, 10 years and beyond, index funds are virtually always going to outperform actively managed funds.
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

                Comment


                  #9
                  The cost of carrying 2% fees over 30 years:

                  $1,133,529.44 = $12,000 / year @ 7% return
                  $797,266.17 = $12,000 / year @ 5% return (2% fee)
                  $336,263.27 = the amount lost to stupid

                  Comment


                    #10
                    Originally posted by disneysteve View Post
                    I'll take that bet any day. Over the long term, 10 years and beyond, index funds are virtually always going to outperform actively managed funds.
                    Define "outperform" ... This word gets thrown around loosely to show how index funds are "better" ..

                    This is not to say Managed funds are but I think the stats are very misleading.

                    Many actively managed funds are design to have lower volatility than the market...

                    Many retirees would rather have a steadier performance around 6% over 7% .. if it means when the correction happens they dip 20% instead of 40%. .

                    in that case, if the managed funds deliver , they would be considered "better" than the index funds.

                    Again .. I'm not saying that's the case .. but NO ONE has ever provided those numbers .. they keep spewing the same old stat. But how did managed funds do in 08 (those that are design to protect the downside)

                    Comment


                      #11
                      Originally posted by disneysteve View Post
                      I'll take that bet any day. Over the long term, 10 years and beyond, index funds are virtually always going to outperform actively managed funds.
                      Originally posted by Captain Save View Post
                      Define "outperform" ... This word gets thrown around loosely to show how index funds are "better" ..
                      When I say "outperform" I mean that it provides a higher average annual return. It has nothing to do with volatility which is an entirely different issue.

                      NO ONE has ever provided those numbers
                      No one has every provided what numbers? Every fund's annual return is readily available. That's where the whole concept of index funds outperforming actively managed funds comes from - a comparison of the two.
                      Steve

                      * Despite the high cost of living, it remains very popular.
                      * Why should I pay for my daughter's education when she already knows everything?
                      * There are no shortcuts to anywhere worth going.

                      Comment


                        #12
                        From Motley Fool:
                        An analysis by Morningstar in 2015 found that fewer than 22% of large-cap stock funds beat the market over the 10-year period from 2005 to the end of 2014. Fees, of course, play the primary role in underperformance. Fewer than 10% of the highest-cost large cap stock funds beat the market, while nearly 30% of the lowest-cost large cap funds did so.

                        You asked about 2008. In the 10 years from 2005-2014, only close to 1 in 5 active funds beat the index. Maybe some of them did better in 2008 specifically but these are long term investments. How they perform in any one year is irrelevant to the big picture.

                        Another important factor if you are not investing in a tax-sheltered account is that index funds are far more tax efficient. They have very low portfolio turnover. With an actively managed fund, not only do you have higher expenses and, most likely, lower returns, you also get hammered in taxes at the end of the year because of all of the buying and selling they tend to do.

                        In full disclosure, I own both index and active funds, so I'm not totally opposed to active funds. You just need to fully understand what you're getting into and what the potential downsides are.
                        Steve

                        * Despite the high cost of living, it remains very popular.
                        * Why should I pay for my daughter's education when she already knows everything?
                        * There are no shortcuts to anywhere worth going.

                        Comment


                          #13
                          Originally posted by Captain Save View Post
                          how did managed funds do in 08 (those that are design to protect the downside)
                          I just came across the answer to this question. There is an article on this topic in the spring issue of On Investing, Schwab's customer magazine.

                          They list the percentage of actively managed U.S. large-cap mutual funds that outperformed the S&P 500 each year from 2007 to 2016.

                          The best year for the actively managed funds was 2007 when 55.4% beat the S&P. In 2008, the majority lost with only 44.1% besting the S&P. They eked out a win again in 2009 with 51.5% doing better. Every year since, the actively managed funds have lost, the worst years being 2011 when only 17.8% outperformed the index and 2014 when a measly 13.3% did so.

                          So in that 10-year period, the index outperformed the actively managed funds 8 of 10 years.

                          I don't know about you, but I'll put my money on the team that wins 80% of the time.
                          Steve

                          * Despite the high cost of living, it remains very popular.
                          * Why should I pay for my daughter's education when she already knows everything?
                          * There are no shortcuts to anywhere worth going.

                          Comment


                            #14
                            Originally posted by disneysteve View Post
                            When I say "outperform" I mean that it provides a higher average annual return. It has nothing to do with volatility which is an entirely different issue.


                            No one has every provided what numbers? Every fund's annual return is readily available. That's where the whole concept of index funds outperforming actively managed funds comes from - a comparison of the two.
                            No one has provided the numbers the volatility of manged funds vs index funds.. specifically the funds that are designed to be "low volatility"

                            I should not say "no one" because I'm sure these funds have a brochure showing how they deliver on their promise.. but I have not seen those numbers from a 3rd party....Most articles and blogs like to regurgitate the same stats.. (which doesn't tell the whole story) ... something is not necessarily better just because you get a higher average return. Timing is everything.

                            Comment


                              #15
                              Originally posted by Captain Save View Post
                              No one has provided the numbers the volatility of manged funds vs index funds.

                              Most articles and blogs like to regurgitate the same stats.
                              You make it sound like some grand conspiracy. The articles and blogs don't talk about volatility because that isn't what most people care about. I'd venture to guess that the vast majority of investors are focused on two things, returns and expenses (and mostly returns). Index funds have better returns and lower expenses, with the added bonus of being way more tax efficient.

                              Volatility is an entirely different issue. I'll take the higher returns over the lower volatility any day.

                              Now my answer might change when I'm retired and living on my investment income but until then, it's all about returns.
                              Steve

                              * Despite the high cost of living, it remains very popular.
                              * Why should I pay for my daughter's education when she already knows everything?
                              * There are no shortcuts to anywhere worth going.

                              Comment

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