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.

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