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You're reading it incorrectly. Buffett is making the claim that people have "waste[d] more than $100 billion over the past decade" looking for superior investme

by gizmo 10y ago

You're reading it incorrectly. Buffett is making the claim that people have "waste[d] more than $100 billion over the past decade" looking for superior investment returns. That's his claim, no more. And I agree. There wouldn't be a stock market if everybody just invests in a fortune 500 index fund. The benefit to society of a functioning stock market is way more than $10B/yr.

pg314 10y ago
No, he isn't reading it incorrectly. Buffett is claiming that on aggregate, because of the fees, the passive investors will be better off than the active investors. From page 23: A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.
- gizmo 10y ago
  Yes, but Buffett is not claiming that active investing (as opposed to passive index investing) is negative-sum in aggregate! That would be ludicrous, because Buffett is an active investor himself and the Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares.
  - deleted 10y ago
    [deleted]
  - pg314 10y ago
    Buffett, as an active investor, can outperform the market, while active investors as an aggregate might not. I fail to see any ludicrousness. > Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares. Nonsense. Buffett doesn't care one whit about people buying more Berkshire Hathaway shares. If anything, he wouldn't mind people selling shares and driving the price down to below 1.2 x book value, so he can buy them back at a discount.
    - gizmo 10y ago
      If active investment were negative-sum in aggregate then society would be better off if there were no active investors at all and everybody would invest in passive index funds instead. Unfortunately you need active investors to keep the market honest, without active investors index funds wouldn't work! Index funds are needed so investment funds don't overcharge their customers, and investment funds are needed to keep the market honest. It makes sense for individuals (or institutions) to invest in index funds, but only up to a point. When too much money is stuck in passive index funds the active investors will easily outperform the market and the smart money will leave the index funds again. The person I was responding to was drawing an analogy to a casino where the money just moves around and the institutions just skim every time money changes hands. That's negative sum. In contrast, society benefits when the stock market gives access to capital to well run companies and takes money away from poorly run companies. So the casino analogy doesn't work. Buffett understands that the stock market as a whole isn't zero sum (or negative sum), and that's true even if all investment firms in aggregate underperform the indexes.
      - tptacek 10y ago
        I think you and your interlocutors are talking past each other. It's true (and fashionable to point out) that active investment is what makes price discovery, and thus the markets themselves, work. But that doesn't make it a good idea to invest in hedge funds or any other active investment vehicles. Just as Buffett describes earlier in the letter w/r/t the insurance business, active investors can compete the returns on effective price discovery down below the returns on passive investing. Maybe over the long term the returns on active investing will simply go to prop traders.
        gizmo 10y ago
        Perhaps it is fashionable to point that out where you live, but common wisdom I hear is "everybody should just use index funds", without stopping to ask what would happen if everybody actually did. Worldwide equities are 65 trillion or so. Can you have a functioning stock market if 1T of that is actively managed by prop traders and the remaining 64T is in passive index funds? I'm not so sure.
  - sumedh 10y ago
    > Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares. If you have read his past reports you will know that he wants his shareholders (he calls them partners) not to sell their shares. He published some numbers in the past as well where 90% of shareholders don't sell and he is very happy about that.

by gizmo 10y ago

pg314 10y ago

No, he isn't reading it incorrectly. Buffett is claiming that on aggregate, because of the fees, the passive investors will be better off than the active investors. From page 23: A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

gizmo 10y ago
Yes, but Buffett is not claiming that active investing (as opposed to passive index investing) is negative-sum in aggregate! That would be ludicrous, because Buffett is an active investor himself and the Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares.
- deleted 10y ago
  [deleted]
- pg314 10y ago
  Buffett, as an active investor, can outperform the market, while active investors as an aggregate might not. I fail to see any ludicrousness. > Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares. Nonsense. Buffett doesn't care one whit about people buying more Berkshire Hathaway shares. If anything, he wouldn't mind people selling shares and driving the price down to below 1.2 x book value, so he can buy them back at a discount.
  - gizmo 10y ago
    If active investment were negative-sum in aggregate then society would be better off if there were no active investors at all and everybody would invest in passive index funds instead. Unfortunately you need active investors to keep the market honest, without active investors index funds wouldn't work! Index funds are needed so investment funds don't overcharge their customers, and investment funds are needed to keep the market honest. It makes sense for individuals (or institutions) to invest in index funds, but only up to a point. When too much money is stuck in passive index funds the active investors will easily outperform the market and the smart money will leave the index funds again. The person I was responding to was drawing an analogy to a casino where the money just moves around and the institutions just skim every time money changes hands. That's negative sum. In contrast, society benefits when the stock market gives access to capital to well run companies and takes money away from poorly run companies. So the casino analogy doesn't work. Buffett understands that the stock market as a whole isn't zero sum (or negative sum), and that's true even if all investment firms in aggregate underperform the indexes.
    - tptacek 10y ago
      I think you and your interlocutors are talking past each other. It's true (and fashionable to point out) that active investment is what makes price discovery, and thus the markets themselves, work. But that doesn't make it a good idea to invest in hedge funds or any other active investment vehicles. Just as Buffett describes earlier in the letter w/r/t the insurance business, active investors can compete the returns on effective price discovery down below the returns on passive investing. Maybe over the long term the returns on active investing will simply go to prop traders.
      - gizmo 10y ago
        Perhaps it is fashionable to point that out where you live, but common wisdom I hear is "everybody should just use index funds", without stopping to ask what would happen if everybody actually did. Worldwide equities are 65 trillion or so. Can you have a functioning stock market if 1T of that is actively managed by prop traders and the remaining 64T is in passive index funds? I'm not so sure.
- sumedh 10y ago
  > Buffett Annual Report is a long form sales letter to persuade people to buy more Berkshire shares. If you have read his past reports you will know that he wants his shareholders (he calls them partners) not to sell their shares. He published some numbers in the past as well where 90% of shareholders don't sell and he is very happy about that.