While active versus passive investing remains a raging debate in the investment community globally, billionaire investor, Warren Buffett is clear–active investment management by professionals would underperform the returns made by amateurs who invest passively. This clarity of thought has made him richer by a $2 million, not to forget the billions of dollars he would’ve made by using the philosophy. “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,” he wrote in Berkshire Hathaway’s annual letter to shareholders in 2016.
For the ‘oracle of Omaha’, these are not just empty words– he literally put his money where his mouth is! In 2007, Warren Buffett wagered $500,000 saying that that the S&P 500 stock index would outperform hedge funds, over a ten year period. Warren Buffett expected a beeline of Hedge Fund managers to be up for the challenge. “Why should they fear putting a little of their own money on the line?,” Warren Buffett wrote in Berkshire’s annual letter in which he explained in detail about the bet. Ted Seides, a hedge fund manager with Protege Partners took up the challenge. Ted Seides contended that he lost the bet in a recent Bloomberg post, “Nine years ago, Warren Buffett and I made a 10-year charitable wager that pitted the returns of five funds of hedge funds against a Standard & Poor’s 500 index fund. With eight months remaining, for all intents and purposes, the bet is over. I lost.”
CNBC reported Debbie Bosanek, Warren Buffett’s secretary as writing in an email statement, “I checked with Mr. Buffett and he told me that it’s absolutely certain that he will win the bet, although it won’t be official until January. The money will go to Girls Inc. and it looks like it will be $2 million or so.” Girls Inc of Omaha is a not-for-profit organisation which works in the area of women empowerment. According to Warren Buffett’s explanation in the letter, by the end of the bet on Dec 31 2017, $1 million invested in the funds chosen by Ted Seides would have gained $220,000 in the same time period that Buffett’s low-fee investment would have earned $854,000, making him a clear winner.
According to Warren Buffett’s estimate, an average investor wasted more than $100 billion on high-fee Wall Street money managers over the past 10 years. A study published by S&P Dow Jones Indices in 2016 showed that about 90 percent of active stock managers failed to beat their index targets over the previous one-year, five-year and 10-year periods. The high fees charged by the managers explain a significant part of the underperformance, as it eats into the returns of the funds.