Warren Buffett’s “Long Bet”

Warren Buffett’s “Long Bet”

Over a ten-year period commencing(kəˈmens) on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio(pôrtˈfōlēˌō) of funds of hedge(hej) funds, when performance is measured(ˈmeZHərd) on a basis(ˈbāsəs) net of fees, costs and expenses.

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(ˈaɡriɡət) their positions will more or less approximate(əˈpräksəmət) 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(inˈkər) far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.

Costs skyrocket(ˈskīˌräkət) when large annual(ˈany(o͞o)əl) fees, large performance fees, and active trading(ˈtrādiNG) costs are all added to the active investor’s equation(əˈkwāZHən). Funds of hedge funds accentuate(əkˈsen(t)SHəˌwāt) this cost problem because their fees are superimposed(ˌso͞opərimˈpōzd) on the large fees charged by the hedge funds in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing(ˈn(y)o͞otrəˌlīz), and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.

https://www.berkshirehathaway.com/letters/2016ltr.pdf