Author: Darrell R. Tierney
I spent five hours last Saturday on the couch.
This time of year I generally prefer to spend Saturdays on my boat, but Berkshire Hathaway graciously streamed their annual shareholders’ meeting on Yahoo Finance. In years past, our team has made the early morning trek to Omaha to personally attend. This year I opted to sit on my comfortable couch and watch Warren Buffett and his partner, Charlie Munger, field questions for five hours with no advance preparation.
Before breaking for lunch, Warren updated the audience on his famous Protégé Partners bet. In 2007, Warren wagered $1,000,000 (to be given to charity) that over ten years, a simple Vanguard S&P 500 fund investment could beat a line-up of five “expert” hedge funds selected by Protégé. These Funds of Funds were selected by Protégé’s, Ted Seides, with the stipulation that the participating funds would not be disclosed.
So the wager is in its eighth year, and cumulative returns are 65.7% and 21.9%, for the S&P 500 index and hedge funds, respectively.
Warren is confident in the bet, because the “expert” hedge funds’ fees, commissions and compensation structure make it very difficult to compete with the sleepy S&P 500 index funds low cost advantages. Warren lamented that he explains this time and again to endowment funds, pension funds and wealthy investors to no avail. They listen and then ignore his advice and hire consultants, advisers and experts with their “2 and 20” compensation schemes to find the next “star” to beat the market.
Why do smart and wealthy people ignore Warren’s advice? I believe people think an expert can and should beat the market. In fact, Warren and Berkshire Hathaway have demonstrated that consistently beating the market is possible. Charlie Munger acknowledged that there are excellent advisors that can return superior results. BUT finding them is a “needle in a haystack.” Most investors and advisors can’t distinguish luck from skill. This creates a problem. As long a very select group can consistently outperform the market, there will be consultants, advisors and salesmen pitching their star investment manager.
How can you use Warren’s advice to your advantage in your investing? First, keep expenses low and trading activity to a minimum. If you hire an advisor, their value lies in helping you develop a plan to secure and protect your future-not in “beating the market.” And most importantly, a good advisor stands between you and your portfolio to help you stay the course and not bail out when things get scary and difficult.
So I spent the day on the couch soaking up this timeless wisdom. As one meeting attendee said, “I come to Berkshire’s annual meeting because it’s like going to church. I know what Warren is going to say, but it’s a good reminder to hear it.”
“Amen” to that!
This blog is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.
Windward is an SEC registered investment adviser. The Firm may only provide services in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about Windward’ registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.