9 ms·

"In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the r

by otalp 10y ago

"In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. ” He then goes on to show how that's been true, and that a standard index fund outperforms almost every hedge funds even before extra fees to the hedge funds are taken into account. It's not the first time this has been pointed out, and it suggests that for non-multimillionaires, an index fund is always the most rational choice. You get close to the return you'd get by investing in real estate, with the added benefit of index funds being much more easily liquifiable.

sethev 10y ago
"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 $100 billion over the past decade."
- csomar 10y ago
  So big money is dumb money? In a big way.
  - btian 10y ago
    Not dumb money. Just doesn't justify the fees that they demand.
arbuge 10y ago
>> You get close to the return you'd get by investing in real estate Close to the return on unleveraged real estate investing. Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.
- countryqt30 10y ago
  Cleary, he meant leveraged real-estate investing. Non-leveraged real estate investing would give you hardly 1-2 % p.a.
- idiot_stick 10y ago
  >Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing. But the market will adjust to cheap leverage. Easy money, house prices go up, you get less value per dollar. So the benefit of leverage is diminished at least a bit.
gizmo 10y ago
Hedge funds make perfect sense for people who want to hedge their capital in specific ways. A hedge fund doesn't need to outperform the market to deliver tremendous value to their customers. Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. For every investment fund that makes oversize profits another fund loses money. It all evens out. That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result. The incentives for professional money managers are also totally misaligned: funds performance is reported quarterly leading to a short term bias; fund managers get a bonus if they invest irresponsibly but get lucky; customers are unsophisticated so it's one big lemon market. I agree that index funds make a lot of sense for non-millionaires (and single digit millionaires), but that's simply because it takes a lot of effort to beat the market even by a few percent so you need a lot of assets for it to be worthwhile.
- pshc 10y ago
  With regard to your first sentence, could you give an example of a specific way to hedge capital? I'm not sure I understand.
  - gizmo 10y ago
    Suppose you're a business with a lot of positive cash flow, but you also have a lot of exposure to the USD-MXN exchange rate. Maybe you have factories in Mexico but sell to the US, it doesn't matter. In that case you can pay a hedge fund to hedge your money so that if the exchange rate collapses you make enough money on the stock market to compensate, so your business will survive until the exchange rate climbs back. Most businesses have very high exposure to one section of the market, so wanting to hedge is natural. If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. If you make cars then economic recessions are scary because new car sales will drop like a brick, and you need to hedge.
    - lotsofpulp 10y ago
      >If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. Until people figure out the magic of bidets! https://www.amazon.com/Luxe-Bidet-Neo-120-Non-Electric/dp/B00A0RHSJO https://www.amazon.com/Luxe-Bidet-Neo-120-Non-Electric/dp/B0...
dsacco 10y ago
I would argue that index funds make the most sense for most millionaires these days, too. For the most part, if a hedge fund is actually worth investing in (and there are quite a few), only institutions will have the capital to play.
- pg314 10y ago
  > if a hedge fund is actually worth investing in (and there are quite a few) Apparently it is hard to come up with a collection of 5 of them that would beat the S&P 500 over 10 years. At least Buffett had a hard time finding counterparties for a bet.
  - arjie 10y ago
    Renaissance Technologies claims 71% annualised from 1994 to 2014.
    - akvadrako 10y ago
      It's easy to find funds that had great performance in the past. If anybody knows how to pick those that will perform in the future, they are keeping it a secret. And you might not be able to invest directly in rentec, but their holdings are public [1]. So if they really had a good secret, it could be replicated. [1] https://www.holdingschannel.com/all/stocks-held-by-renaissance-technologies-llc/ https://www.holdingschannel.com/all/stocks-held-by-renaissan...
      - gizmo 10y ago
        Those are only their LONG holdings, and rentec isn't a long only fund. In addition, SEC disclosures lag behind and doesn't disclose at what price shares were acquired. So by looking at their SEC disclosure forms you can see which investments would have made you money in the past, the only thing you now need is a time machine.
      - whitepoplar 10y ago
        RenTec doesn't make money off "buy and hold." They're a quant firm that profits from small inefficiencies in the market, trading that with leverage. Their really good secret is that they have superior data sources, and superior modeling (lowering their risk to almost nothing).
isclever 10y ago
Not only do you get on average better returns, you can do better even when they perform poorly since those funds (in Canada) can charge you anywhere from 1.5% to 3% of your portfolio in fees (MER), while an index fund could charge as low as 0.1%. https://www.wealthsimple.com/ https://www.wealthsimple.com/ (I'm a customer) has recently expanded into the US from Canada and are one of a group of what is being called Roboinvestors which take these index funds and let you easily invest in them. Wealthsimple adds on 0.5% fee which is still lower then active funds, my portfolio has a weighted MER of 0.64%.
- marcandre 10y ago
  0.64% MER is much higher than what you can get with Vanguard. Mutual funds are about 4x less expensive, some ETFs are 10x less expensive.
  - isclever 10y ago
    My personal view of using Wealthsimple is a stepping stone, I've realise that I've throw away money to the banks with higher then needed MERs and Wealthsimple provide a easy way of transferring my money in and saving money now. When my portfolio is larger and I'm seeing a higher cost with them VS doing it myself I'll look into buying ETFs myself. The lowest bank mutual fund in Canada that I've seen in from Tangerine at ~1% MER, are there ones lower?
    - loeg 10y ago
      https://www.vanguardcanada.ca/ https://www.vanguardcanada.ca/
    - eswat 10y ago
      > The lowest bank mutual fund in Canada that I've seen in from Tangerine at ~1% MER, are there ones lower? Without having to handle rebalancing yourself? AFAIK then Wealthsimple and Tangerine are already the lowest you'll find without working with ETFs or index funds directly.
JumpCrisscross 10y ago
> a standard index fund outperforms almost every hedge funds even before extra fees Hedge funds beat the market before fees [1]. (Mutual funds do not [2].) It's just that hedge fund managers are great at gobbling up that alpha with fees. One way to look at this is hedge fund investors subsidise the efficient price-discovery function hedge funds provide the market. [1] http://www.marketwatch.com/story/90-of-fund-managers-beat-the-market-but-their-shareholders-dont-2015-01-21 http://www.marketwatch.com/story/90-of-fund-managers-beat-th... [2] https://mobile.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html https://mobile.nytimes.com/2015/03/15/your-money/how-many-mu...
pmart123 10y ago
I just wrote about this, but if you read his 2005 letter(when he proposed the bet), he mentioned changing allocations can be much more disastrous than fees. Here's the link, which my first point covers: https://www.linkedin.com/pulse/3-things-you-might-have-missed-warren-buffetts-annual-philip-martin https://www.linkedin.com/pulse/3-things-you-might-have-misse...

by otalp 10y ago

sethev 10y ago

"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 $100 billion over the past decade."

csomar 10y ago
So big money is dumb money? In a big way.
- btian 10y ago
  Not dumb money. Just doesn't justify the fees that they demand.

arbuge 10y ago

>> You get close to the return you'd get by investing in real estate Close to the return on unleveraged real estate investing. Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing.

countryqt30 10y ago
Cleary, he meant leveraged real-estate investing. Non-leveraged real estate investing would give you hardly 1-2 % p.a.
idiot_stick 10y ago
>Most real estate investing is significantly leveraged, to a larger extent than possible (or recommended) for stock market investing. But the market will adjust to cheap leverage. Easy money, house prices go up, you get less value per dollar. So the benefit of leverage is diminished at least a bit.

gizmo 10y ago

Hedge funds make perfect sense for people who want to hedge their capital in specific ways. A hedge fund doesn't need to outperform the market to deliver tremendous value to their customers. Secondly, every trade has a counterparty. So somebody necessarily has to be at the loser's end of every trade. For every investment fund that makes oversize profits another fund loses money. It all evens out. That doesn't mean it's entirely zero sum, though, because money still flows from bad businesses towards good businesses as a result. The incentives for professional money managers are also totally misaligned: funds performance is reported quarterly leading to a short term bias; fund managers get a bonus if they invest irresponsibly but get lucky; customers are unsophisticated so it's one big lemon market. I agree that index funds make a lot of sense for non-millionaires (and single digit millionaires), but that's simply because it takes a lot of effort to beat the market even by a few percent so you need a lot of assets for it to be worthwhile.

pshc 10y ago
With regard to your first sentence, could you give an example of a specific way to hedge capital? I'm not sure I understand.
- gizmo 10y ago
  Suppose you're a business with a lot of positive cash flow, but you also have a lot of exposure to the USD-MXN exchange rate. Maybe you have factories in Mexico but sell to the US, it doesn't matter. In that case you can pay a hedge fund to hedge your money so that if the exchange rate collapses you make enough money on the stock market to compensate, so your business will survive until the exchange rate climbs back. Most businesses have very high exposure to one section of the market, so wanting to hedge is natural. If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. If you make cars then economic recessions are scary because new car sales will drop like a brick, and you need to hedge.
  - lotsofpulp 10y ago
    >If your business makes toilet paper you have it easy because no matter what happens demand for your product won't collapse overnight. Until people figure out the magic of bidets! https://www.amazon.com/Luxe-Bidet-Neo-120-Non-Electric/dp/B00A0RHSJO https://www.amazon.com/Luxe-Bidet-Neo-120-Non-Electric/dp/B0...

dsacco 10y ago

I would argue that index funds make the most sense for most millionaires these days, too. For the most part, if a hedge fund is actually worth investing in (and there are quite a few), only institutions will have the capital to play.

pg314 10y ago
> if a hedge fund is actually worth investing in (and there are quite a few) Apparently it is hard to come up with a collection of 5 of them that would beat the S&P 500 over 10 years. At least Buffett had a hard time finding counterparties for a bet.
- arjie 10y ago
  Renaissance Technologies claims 71% annualised from 1994 to 2014.
  - akvadrako 10y ago
    It's easy to find funds that had great performance in the past. If anybody knows how to pick those that will perform in the future, they are keeping it a secret. And you might not be able to invest directly in rentec, but their holdings are public [1]. So if they really had a good secret, it could be replicated. [1] https://www.holdingschannel.com/all/stocks-held-by-renaissance-technologies-llc/ https://www.holdingschannel.com/all/stocks-held-by-renaissan...
    - gizmo 10y ago
      Those are only their LONG holdings, and rentec isn't a long only fund. In addition, SEC disclosures lag behind and doesn't disclose at what price shares were acquired. So by looking at their SEC disclosure forms you can see which investments would have made you money in the past, the only thing you now need is a time machine.
    - whitepoplar 10y ago
      RenTec doesn't make money off "buy and hold." They're a quant firm that profits from small inefficiencies in the market, trading that with leverage. Their really good secret is that they have superior data sources, and superior modeling (lowering their risk to almost nothing).

isclever 10y ago

Not only do you get on average better returns, you can do better even when they perform poorly since those funds (in Canada) can charge you anywhere from 1.5% to 3% of your portfolio in fees (MER), while an index fund could charge as low as 0.1%. https://www.wealthsimple.com/ https://www.wealthsimple.com/ (I'm a customer) has recently expanded into the US from Canada and are one of a group of what is being called Roboinvestors which take these index funds and let you easily invest in them. Wealthsimple adds on 0.5% fee which is still lower then active funds, my portfolio has a weighted MER of 0.64%.

marcandre 10y ago
0.64% MER is much higher than what you can get with Vanguard. Mutual funds are about 4x less expensive, some ETFs are 10x less expensive.
- isclever 10y ago
  My personal view of using Wealthsimple is a stepping stone, I've realise that I've throw away money to the banks with higher then needed MERs and Wealthsimple provide a easy way of transferring my money in and saving money now. When my portfolio is larger and I'm seeing a higher cost with them VS doing it myself I'll look into buying ETFs myself. The lowest bank mutual fund in Canada that I've seen in from Tangerine at ~1% MER, are there ones lower?
  - loeg 10y ago
    https://www.vanguardcanada.ca/ https://www.vanguardcanada.ca/
  - eswat 10y ago
    > The lowest bank mutual fund in Canada that I've seen in from Tangerine at ~1% MER, are there ones lower? Without having to handle rebalancing yourself? AFAIK then Wealthsimple and Tangerine are already the lowest you'll find without working with ETFs or index funds directly.

JumpCrisscross 10y ago

> a standard index fund outperforms almost every hedge funds even before extra fees Hedge funds beat the market before fees [1]. (Mutual funds do not [2].) It's just that hedge fund managers are great at gobbling up that alpha with fees. One way to look at this is hedge fund investors subsidise the efficient price-discovery function hedge funds provide the market. [1] http://www.marketwatch.com/story/90-of-fund-managers-beat-the-market-but-their-shareholders-dont-2015-01-21 http://www.marketwatch.com/story/90-of-fund-managers-beat-th... [2] https://mobile.nytimes.com/2015/03/15/your-money/how-many-mutual-funds-routinely-rout-the-market-zero.html https://mobile.nytimes.com/2015/03/15/your-money/how-many-mu...

pmart123 10y ago

I just wrote about this, but if you read his 2005 letter(when he proposed the bet), he mentioned changing allocations can be much more disastrous than fees. Here's the link, which my first point covers: https://www.linkedin.com/pulse/3-things-you-might-have-missed-warren-buffetts-annual-philip-martin https://www.linkedin.com/pulse/3-things-you-might-have-misse...