Who’s winning Warren Buffet’s 10 year old bet on passive investing?

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds. – Warren Buffet

In his annual letter to Berkshire Hathaway Shareholders for the year 2016, legendary investor and founder of Berkshire Hathaway, Warren Buffet, speaks about passive investing. And his strong conviction in them as an investment option, for both large and small investors, over active funds. Very interestingly, 10 years ago he publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees.” Only one fund manager took up the challenge and created a basket of 5 funds that he believed would outperform the index fund over a 10 year period (2008-2017).

The active funds portfolio delivered returns of 2.2% annualized over the first 9 years. While the index fund gave annualized returns of 7.1%. That means an amount of USD 1,000,000 invested in both would translate into USD 1.22 Million for the active funds basket and USD 1.85 Million for the index fund.

There is one year left for the bet to fully play out. Will the active portfolio catch up and beat the index fund?

Do refer to the full letter for more details here. Do go through the entire letter but if you are in a hurry, the wager details are from page 21-25.

What about you think about passive investments?

And now coming back to your own mutual fund portfolio, have you considered index funds over active funds?

They are not marketed with the same zeal as active funds. But there are good options out there for you to invest at a cost of just 11bps. Yes, that’s 11 paise for every Rs 100 invested. For active funds, this cost can be more than 20 times higher.

At Kuvera, we recommend only direct plans of mutual funds and where possible, low-cost index funds.
So you benefit not only from the low management expenses but also, from no commissions as there is no broker involved.

If you haven’t yet tried us yet, today is as good a day as any to do so. Simply visit kuvera.in and start your personalized plan today.

3 Responses

  • Arvind Patil

    November 22, 2017 AT 05:29

    HI Neelabh,
    Thanks for the article . This is very interesting!. Do we have index funds for small and midcap in india? and can you point us to the returns just as described in the article for S&P 500 index fund.
    Had read a similar article where elsewhere which quote 40% of actively managed funds in India could not beat their Bench-marked index.

  • Priya

    April 17, 2018 AT 14:21

    The Bet in the Letter is an absolute MUST-Read 😀
    Insightful & hilarious.

    “The Bet” (or how your money finds its way to Wall Street)

    5 pages up here – https://imgur.com/gallery/v59Wk