PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - FRONT PAGE - Richard Dyson

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

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