Warren Buffett's biggest investment tip: Be wary of fees.
At the annual meeting of his Berkshire Hathaway, the billionaire CEO saved a prime portion of the weekend event to argue again why investors would be better off ditching expensive money managers and consultants.
After telling shareholders that he would offer “probably the most important investment lesson in the world,” Mr. Buffett said Wall Street salesmanship has masked poor returns for years. Consultants, he added, have steered pension funds and others to high-fee managers who, as a group, underperform what you could get “sitting on your rear end” in index funds. The arrangements “eat up capital like crazy,” he said.
Mr. Buffett was building on an argument he's been making for years about why backing U.S. businesses in aggregate, through low-cost funds, is the more certain way to prosper over the long haul. To make his point, he made a bet that a Vanguard Group fund that tracks the S&P 500 index could outperform a basket of hedge funds from 2008 through 2017. Proceeds will go to charity.
On April 30, he gave an update: The bundle of hedge funds picked by Protege Partners had returned 21.9% in the eight years through 2015. The S&P 500 index fund had soared 65.7%.
The chart showing results from the wager was “poignant” for the crowd that gathered April 30 in Omaha, Neb., said David Rolfe, who oversees $8.5 billion, including Berkshire shares at Wedgewood Partners. Mr. Buffett was “pounding the table pretty hard,” Mr. Rolfe said. “There's a lot of high-profile money managers in this audience, and most of them are probably not earning their fees.”
Compounding the problem are middlemen who charge fees to pick managers, Mr. Buffett told shareholders.
“Supposedly sophisticated people, generally richer people, hire consultants. And no consultant in the world is going to tell you, 'Just buy an S&P index fund and sit for the next 50 years,'” Mr. Buffett said. “You don't get to be a consultant that way, and you certainly don't get an annual fee that way.”
In many ways, Mr. Buffett forecast a trend with his bet. Investing in indexes and exchange-traded funds has accelerated since the 2008 financial crisis. By comparison, poor performance by hedge funds as a group has led investors to pull money recently.
Hedge funds, on average, lost 0.6% this year through March 31, according to data compiled by Bloomberg. Last year, 979 funds closed, more than any year since 2009, and the industry saw outflows of $16.6 billion in the last two quarters, according to Hedge Fund Research.
While Mr. Buffett highlighted Berkshire's holding of Wells Fargo & Co., he said he would probably avoid investing in 45 out of the 50 largest banks, citing hidden risks tied to the use of derivatives.
“It's still a potential time bomb in the system,” Mr. Buffett said of the contracts, adding that a disruption in markets, potentially from a cyberattack, could make it hard for the largest lenders to value their holdings. “Anything where discontinuities can exist can be real poison in markets.”