The Best Investment Advice of the Year
“There’s been far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”
That’s what billionaire Warren Buffett just told a room full of investors.
And he’s right. Speaking before tens of thousands of shareholders, the billionaire explained that following the advice of investment consultants and hedge funds is usually a “huge minus.”
“Passive investors can do better than ‘hyperactive’ investments handled by consultants and managers who charge high fees.”
It’s well known Warren Buffett abhors fees. So much so he has famously wagered $1 million that a low-priced S&P 500 index run by Vanguard could beat the performance of five fund-of-funds picked by a money management firm, Protégé Partners.
Eight years into this ten-year bet, the hedge funds have had cumulative returns of 21.9%, as compared to the 65.7% returns on the S&P 500. In six of the eight years, the S&P 500 outperformed those funds.
It’s no wonder that Vanguard attracted $256 billion of new money last year – more than its competition, and 5.3% above 2014. In the last five years, net inflows have been nearly $1 trillion, more than twice the amount attracted by the entire hedge fund industry over the same time.
The point Warren Buffett was making was a simple one.
Investors can do much better on their own than relying on consultants and managers who typically charge high fees. For example, with a typical hedge fund, an investor is charged 2% of total asset value as a management fee and then an additional 20% on any profit earned.
Here’s a great example of how ridiculous that fee structure is.
Allan Sloan, a seven-time Gerald Loeb Award–winning columnist for the Washington Post, reported on May 16, 2015, what the returns for Berkshire Hathaway would have been if Warren Buffett ran it with the 2-and-20 hedge fund model.
From year-end 1987 to year-end 2014, the price of Berkshire Hathaway went from $2,950 a share to $226,000, which works out to 17.4 percent per year. Under the 2-and-20 model, an investor would have had made only $69,633. This explains why so many hedge fund managers have become obscenely wealthy, despite embarrassingly low and inconsistent fund returns over many years.
Meanwhile, even as hedge fund managers continue to suffer since 2010, they’re still making a great deal of money through fee structures. Sadly, such excessive fees run rampant in the industry, with investors footing the bill with investment underperformance at best and large losses at worst crestor dosage.
“Frankly, I’m blown away by the lack of talent,” says Steve Cohen, the billionaire trader whose hedge fund produced annual gains of 30%, as quoted by Bloomberg. “Talent is really thin.”
Even Bill Gross joined in on the attack, noting, ““Hedge fund fees exposed for what they are: a giant rip off. Forget the 20 – it’s the 2 that sends investors to the poorhouse.”
Overall, if I wanted to invest in a fund or with a broker, I would want that fund manager or broker to be already obscenely successful from making huge profits investing their own money, not from fees.
If they can make money for themselves, they can certainly make money for me. And, the more they have made for themselves, the more they can make from me. I certainly hope you agree here!
As simple as it may be, you now know why very few professional investors consistently make money:
It’s because they have not learned how to profit themselves, so they cannot make money for others.
As I noted at the start of 2016, resolve to only invest with those who can clearly prove to you that they have made consistent profits investing their own money, whether that’s in stocks, bonds, or the third largest asset class in the world – real estate!