Friday, April 28, 2017

Buffett on Bogle

"If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.

In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me." - From Warren Buffett's latest letter

John Bogle, in a speech last year, noted that:

- Hedge funds, in total, managed at the time something like $2.8 trillion in assets
- Investors in such funds pay out to their managers ~ 3 percent per annum -- what he calls an "informed guess" -- or roughly like $ 84 billion (yes...billion) in fees per year
- Vanguard manages ~$3 trillion in assets -- nearly the same amount as all hedge funds combined -- with two thirds being index funds.
- The cost of managing the ~ $2 trillion of index fund assets = .08 percent of assets per annum = ~ $ 1.6 billion

Quite a difference in costs even after normalizing the $ 2.8 trillion to the size of the index fund asset base. The compounded impact of these extra costs for investors over the long haul is hardly small.

In fact, even a traditional actively managed mutual fund that charges something like "only" 1 percent per annum is an order of magnitude more costly than the typical index fund. Imagine two investors. Both have $ 100k to invest and a 35 year investment horizon. Each have portfolios excluding fees that produce a 6 percent annual return over those 35 years. The only difference is one of the investors is paying 1 percent in annual fees while the other has .08 percent in annual fees.

So how much more wealth would the low fee paying investor have at the end of the 35 year investment horizon?

~ $ 200k

What's worth noting is that here we have someone who's accomplished great success through active investing (Buffett) with high respect and admiration for the person (Bogle) who has been encouraging investors to avoid such an approach for decades.

To understand why this seemingly inherent conflict might exist just consider the frictional costs -- or lack thereof -- inherent to Buffett's approach. Now, imagine if Buffett charged investors something like the 3% in annual fees to manage Berkshire Hathaway's (BRKa) current portfolio -- ~ $ 276 billion of cash and investments at the end of 2016 -- instead of the $ 100,000 salary plus security costs?*

Berkshire would instantly become a very different and very much less valuable investment -- more than $ 8 billion in additional costs tends to do that -- but that'll have to be a subject for another day.

High fees or not, it's just not easy to figure out who'll be able to produce -- over many years/decades and many investing environments -- satisfactory or better results.

Add in the high fees and an already difficult task becomes even tougher.

When it comes to investing -- and often well beyond the world of investing -- it's tough to beat the wisdom of Bogle and Buffett.


Long position in BRKb eastablished at much lower than recent market prices

Related posts:
Innovators, Imitators, & the Swarming Incompetents
Bogle & Buffett on Frictional Costs
Buffett on Active Investing
John Bogle: Arithmetic Quants vs Algorithmic Quants
Hedge Funds: Balancing Risk & Reward?
Index Funds vs Actively Managed Funds
John Bogle on Investor Returns
Buffett's Hedge Fund Bet
John Bogle's "Relentless Rules of Humble Arithmetic", Part II
Index Fund Investing Revisited
Howard Marks on Risk
Charlie Munger on Complexity, Hedge Funds, and Pension Funds
Why Do So Many Investors Underperform?
When Mutual Funds Outperform Their Investors
John Bogle's "Relentless Rules of Humble Arithmetic"
Investor Overconfidence Revisited
Newton's Fourth Law
Investor Overconfidence
Chasing "Rearview-Mirror Performance"
Index Fund Investing
Investors Are Often Their Own Worst Enemies, Part II
Investors Are Often Their Own Worst Enemies
The Illusion of Skill
Buffett's Bet Against Hedge Funds, Part II
Buffett's Bet Against Hedge Funds
The Illusion of Control
Buffett, Bogle, and the "Invisible Foot" Revisited
If Buffett Were Paid Like a Hedge Fund Manager - Part II
If Buffett Were Paid Like a Hedge Fund Manager
Buffett, Bogle, and the Invisible Foot
Charlie Munger on LTCM & Overconfidence
"Nothing But Costs"
Bogle: History and the Classics
When Genius Failed...Again

* Otherwise, Buffett generally receives no stock options, stock grants or bonuses. Keep in mind that Buffett's $ 100,000 salary covers not only his investment portfolio responsibilities, but also finding and buying new businesses outright, and making sure the many businesses Berkshire already owns outright (which combined have 367,000 employees according to the latest annual report) are run effectively by honest and capable people (among other things).

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