Buffett’s $1m winning bet a lesson for all investors
WARREN Buffett, the world’s richest investor, is not seen as someone who takes risky bets. The 87-year-old’s strategy has always been to avoid shortterm speculation and, instead, stick with high-quality investments for many years and this has delivered him a fortune north of $100 billion.
However, a bet Mr Buffett (pictured) placed a decade ago is about to pay off next month – and is a valuable lesson for all investors.
In 2007, he bet $1 million that a low-cost fund that tracks America’s S&P 500 share index would do better over a decade than hedge funds, which are run by some of the so-called brightest minds in business.
Hedge funds charge high fees to make fancy moves with your money with the aim of generating big profits and outperforming the overall market.
Buffett’s bet has proved otherwise, with the only hedge fund manager who took him up on it conceding defeat earlier this year because he was so far behind the index fund.
On December 31, the bet ends and Mr Buffett’s winnings will go to a Neb- raska charity for girls.
High fees charged by hedge funds – typically 2 per cent of their investors’ money – were a key factor in why it fell behind, its manager said.
In contrast, ex- change-traded funds (ETFs) that track a share market index spread your money over potentially hundreds of stocks and usually have investment fees below 0.2 per cent. The huge fee difference helps explain why ETFs have surged in popularity in the past decade. A growing number of financial planners are recommending them to clients because of their low costs and good track record.
However, index funds do have their critics. Some say the Aussie market is so concentrated in just a few stocks – mainly banks and resources – that weakness in them skews the index and fails to properly diversify investors’ money.
Others critics say ETFs haven’t really been through a massive sharemarket downturn like we had in the glocal financial crisis, so their effectiveness when everyone is selling out has yet to be tested.
Many of the critics are active investment managers who back themselves to do better than the market but statistics show that they have often fallen short. Some active managers complain about other active managers they think are too passive.
Meanwhile, passive investment funds have continued to quietly improve. There are now around 200 ETFs trading on the ASX covering shares, fixed interest, commodities and other assets. They are extremely popular for people wanting to invest in overseas shares but don’t have the local knowledge.
Be careful with some ETFs, though. Investment fees for many of the smaller specific funds (Taiwan shares, global cybersecurity or overseas gold miners anyone?) are more than twice as high as fees for larger established ETFs.
Being an active or passive investor is all about choice, confidence and your trust in experts to do better than the market. If you’re unsure, follow Warren Buffett’s lead – passive, low-cost investment funds are probably not a bad thing.