Warren Buffett’s latest win doesn’t prove that stock picking is a waste of time
So veteran investor Warren Buffett has won yet another big bet in the past few days. In 2007 he claimed that a dirt-cheap, computer-run portfolio that blindly followed the S&P 500 stock market index would deliver better returns over a decade than a portfolio overseen by a team of brilliant, experienced hedge fund managers who could back any asset or investment strategy on earth – no matter how esoteric.
The decade is up and it wasn’t anything like a close finish. According to calculations by
the dirt-cheap tracker fund has returned an annual 7.1pc compared with the hedge fund’s 2.2pc.
The tracker doubled investors’ original money. The hedge fund grew it by around a quarter.
The winnings, worth more than £1m, will go to a charity of Mr Buffett’s choosing.
But others will feel as though they too have won the wager. There is a large and growing fan base for tracker funds, also known as “passive funds”, which maintains unswervingly that the best way to invest in the stock market is to eliminate the human risk that comes with active stock selection and instead buy the market itself, as determined by any one of many mechanical indices. The latter route is also much cheaper, as there are no fund managers and analysts to pay.
It’s a sprawling debate that has generated masses of analysis, data and passionate views on both sides.
But it would be wrong to seize on Mr Buffett’s wager victory as straightforward proof that trackers are best. The decade covered by the bet was after all a lucky one, with the index breaking successive record highs.
But more significantly, I don’t believe Mr Buffett himself subscribes to any such simplistic view. His primary criticism of hedge fund managers and other specialist stock pickers is that they are very expensive. He believes well-off investors in particular are prey to the notion that they have to pay a high price in order to get a good investment outcome.
In his 2017 annual letter to shareholders in Berkshire Hathaway, the investment vehicle that he oversees, he wrote: “My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100bn [£74bn] over the past decade.
“Of course, not every investor who put money in hedge funds 10 years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.”
Mr Buffett reckons most people will be served well if they “consistently buy a low-cost S&P index fund”, more or less regardless of their overall wealth. And that is not such a contentious position. The tracker fund is guaranteeing investors low charges (even if it also guarantees a perpetual failure to outperform the market). And for those who are regularly investing, as
Calling it right – again: Warren Buffett’s 10-year bet that a cheap tracker could outperform a costly hedge fund has just been proved correct