Lessons from the ‘Oracle’

MAKE USE OF ETFS AND UNIT TRUSTS Active managers’ constant selling in and out of positions incurs substantial costs, which erodes gains.

the team who’d try to beat him. They picked five funds-of-funds they expected to outperform the S&P 500. The funds owned interests in over 200 hedge funds. This assemblage was an elite crew, with brains, adrenaline and confidence.

The five funds-of-fund managers had a further advantage, Buffet wrote. They could – and did – rearrange their portfolios of hedge funds during the decade, investing with new “stars” while exiting their positions in hedge funds whose managers had lost their touch.

You’d imagine the odds were stacked against Buffet.

“The five funds-of-funds got off to a fast start, each beating the index fund in 2008. Then the roof fell in. In every one of the nine years that followed, the funds-of-funds as a whole trailed the index fund,” Buffet wrote.

There were several unforeseen investment lessons from the bet.

Active managers’ constant selling in and out of positions incurs substantial costs, eroding any gains that may have been made. Known for his (very) long positions, it should come as no surprise to hear Buffet advise investors to “stick with big, easy decisions and eschew activity”.

The next is, back yourself. Though markets are generally rational, they occasionally do crazy things, he says. Seizing the opportunities offered doesn’t require great intelligence, an economics degree or knowing investment jargon. Investors need an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.

For investors who don’t have the time to digest annual reports and company stock exchange announcements as he does, Buffett’s message is clear: take advantage of the increasing array of ETFs and unit trusts available.

Then sit back and let the market do the work.