Each year, Warren Buffett provides a fabulous read when he releases his annual letter to shareholders. That annual letter is filled with information about Berkshire Hathaway, but the more interesting sections for many folks are the investment stories and anecdotes from the so-called sage of Omaha
In the 2016 edition, one of the primary stories deals with Buffett’s challenge to active management. Nine years ago Buffett made a public bet of $500,000 stating that the S&P 500 would beat the cumulative or average returns of the hedge fund industry over a ten year period of time. Only one fund manager was willing to come forward and take the bet.
The bet is now heading into its final year with hedge funds trailing very badly. At this point, the S&P 500 and Buffett’s charity stand to win the big bet.
On the program this week, I spend time going through the story, the results and in Buffett’s own words the multiple problems of active management. It is a cautionary tale worth the time.
Later in the program I speak about my own concerns with hedge funds. Ultimately, I don’t think hedge funds are a good investment or bet for most people. The cost structure, the lack of transparency and the lack of liquidity are major stumbling blocks in my opinion.
Based on what I have seen over the years, most people would be better off in much simpler, low cost, liquid and transparent investments. Less is often more in the investment world. That rings true to me with costs.
I hope you enjoy the podcast this week.
All the best – Gary
Do you have a question for Gary? Do you need help with your investments? The best way to reach Gary is by emailing him at firstname.lastname@example.org.
Investing is often portrayed as a complicated and mysterious process. It certainly is confusing for most people to understand what is going on. Wall Street is notorious for speaking a different language that no one outside of the club understands. In the wake of the recent financial crisis, we found out that Wall Street titans also claim they do not know what is going on either. That was their defense when grilled by regulators and politicians who were looking for blame. They honestly said, we really did not understand the products being developed by our own firms. We did not realize how risky they were and so on.
No wonder people will throw up their hands and say, I don’t get it. Well, I have a different way at looking at things. I tend to ignore what Wall Street says and simply focus on what they do. What I mean by that is the following. They can certainly spin a complicated tale about how talented, experienced and good they are, but that is worthless to me. Instead, I focus on something more relevant to my needs. How did they do delivering on their promise of beating financial markets?
One can talk a good game, but ultimately, you have to play. In Wall Street’s case, active management is their promise of beating the market. Unfortunately, the record is abysmal for the mighty on Wall Street. Study after study concludes that active management after taking into account their expenses fails to deliver on its singular promise for existing. They fail to beat the market on a risk-adjusted and after cost basis. People can spin the tail, provide excuses for why they came up short, but in the end… the story is the same. Active management fails to stand up against market rates of return.
On the program this week I spend time chatting about:
Segment One – Failure of Active Management
Segment Two – The incredible pay of active managers
Segment Three – A case study of active management failure