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  #1 (permalink)  
Old 02-20-2018, 12:50 PM
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Default 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.

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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.
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Old 02-20-2018, 10:55 PM
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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.
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Old 02-21-2018, 11:35 AM
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Buffetts point is that, for the majority of people, actively manged hedge funds are no better than index funds...regardless of the time period.
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Old 02-22-2018, 12:41 AM
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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?
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Old 02-22-2018, 05:50 AM
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active fund fees: $$$

Index fund fees: $
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Old 02-22-2018, 05:58 AM
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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.
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Old 02-22-2018, 07:03 AM
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Quote:
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?
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Old 02-22-2018, 07:03 AM
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Quote:
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.
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Old 02-22-2018, 08:52 AM
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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
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Old 03-09-2018, 11:55 AM
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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)
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Old 03-09-2018, 12:13 PM
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Quote:
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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.
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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.

Quote:
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.
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Old 03-09-2018, 12:29 PM
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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.
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Old 03-10-2018, 07:39 PM
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Quote:
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.
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Old 03-11-2018, 06:03 PM
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Quote:
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.
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Old 03-11-2018, 06:45 PM
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Quote:
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.
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Old 03-12-2018, 03:08 PM
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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.
not a conspiracy.. but more so people feel that it has to be one thing or the other.. Team A or Team B ... I have most of my money on index funds as well.. so I am a fan... it takes a lot more research to invest in a managed fund.. I would probably find the numbers I alluded to earlier if I were that interested in putting my money there.

I'm sure you understand the issue of volatility and when it matters vs when it doesn't.. but not everyone reading some random blog understands that...and they're being taught to be on TEAM A .. .
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Old 03-12-2018, 04:20 PM
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I'm sure you understand the issue of volatility and when it matters vs when it doesn't.. but not everyone reading some random blog understands that...and they're being taught to be on TEAM A .. .
That's certainly a fair point. I'm not suggesting that volatility doesn't matter. It just isn't a driving factor in most people's investment decisions. If you are investing for the long term, 20 or 30 years, volatility matters far less than returns and expenses. As I said, if you are investing for current income, then volatility becomes extremely important.
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Old 03-13-2018, 08:10 AM
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"Managed Fund" covers a broad range of funds.
Buffets comments seem to be about hedge funds, but the conversation here seems to have morphed to cover all managed funds.

A fund like Vanguard's Wellesley Income Fund (my DH owns shares) is a managed fund. Admiral Shares 10-year return 7.18%, expense ratio 0.15%. Not exactly setting the investing world on fire, but not shabby either. And that's with a conservative 40/60 mix.
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Old 03-13-2018, 08:36 AM
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I think the overriding lesson in all of this is that mutual funds, by their nature, are pretty mediocre. They have to be. If you are expecting them to deviate much from averages, you don't understand the math very well:

You can't take in $1 billion from your mutual fund customers and just do nothing with it. You have to buy shares in companies. And of course you can't be too overweight in this or that company, so you have to buy shares in OTHER companies. Compromises are then made - maybe the profitability of ABC Company is more questionable than XYZ Company, but we are supposed to be "fully invested" and we have all this new money lying around, so we have to buy shares of ABC Company.

In the end, the mutual fund owns shares of 100s of companies, and the returns are watered down commensurately.
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Old 03-13-2018, 11:35 AM
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I think the overriding lesson in all of this is that mutual funds, by their nature, are pretty mediocre.

the mutual fund owns shares of 100s of companies
"Mediocre" is in the eye of the beholder. My largest holding, which I've been in for over 20 years, is a mutual fund that has posted an average annual return of over 16% for more than 30 years. I've made a ton of money with that investment. Is 16+% mediocre? I don't think so.

There are plenty of funds out there with long track records of averaging 10%/year or more. I think most people would be quite satisfied with a 10% annual return even if it doesn't measure up to what you aim for with your investments.

As for a fund owning hundreds of companies, that's not necessarily true. Certainly there are funds that own hundreds or even thousands of companies. But there are also funds that own as few as a couple dozen.

There are over 9,500 mutual funds in the US alone. It's hard to make broad generalizations about what they are or aren't.
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