This past weekend, the “Oracle of Omaha” Warren Buffett (one of the world’s richest men and most respected investors for decades), released his annual Shareholder Letter. Every year, Mr. Buffett’s Shareholder Letter is somewhat of a major event for the investing world, much in the same way that the Oscars (which wrapped up last night after only minor confusion) are a major event for the entertainment industry.
Mr. Buffett had a lot to say in this year’s Shareholder Letter. One issue he was particularly vocal about was hedge fund fees. “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,” Buffett wrote.
To corroborate his distaste for high fees, Mr. Buffett referred to a remark he made in a report almost a decade ago. “I 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 investment vehicles – that would, over an extended period, match the performance of an unmanaged S&P-500 index fund charging only token fees.”
In his report, Buffett released documents showcasing the performance of his unmanaged index fund, compared to that of five major hedge funds. After nearly a decade, Mr. Buffett’s index fund (which carries significantly lower fees than hedge funds) was up an astounding 85.4%, whereas the average of the five hedge funds was up a mere 22%.
Through this example, Mr. Buffett proved two incredible points. One is that high fees don’t necessarily mean high performance, and in fact can mean poor performance. The second point he proved is this: “I argued that active investment management by professionals – in aggregate – would, over a period of years, underperform the returns achieved by rank amateurs who simply sat still.”
Mr. Buffett is making a strong case for long-term investing. He is advocating for investments which don’t look to maximize returns in the 3 or 6 month period, but those investments which maximize returns over several years, or even decades.
After all, when we make investments, especially that most common investment of all, retirement, we are investing that money for long periods of time. Why not, then, make investments which focus on long-term growth? It makes a lot of sense. And, as Mr. Buffett objectively proved, it makes a lot of dollars as well.
In his letter, Buffett also commented on share repurchases, which have become increasingly popular the past several years. Some argue, however, that companies use share repurchases to artificially inflate share prices by restricting the number of shares available to the market. Buffett argued that companies should be more transparent about the prices they are willing to repurchase shares at.
Finally, while he chose to make no comments one way or the other on the subject of politics, Mr. Buffett did choose to remark on the contribution that diversity has played in creating the world’s most prosperous nation. “Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”
If you’d like to read the entirety of Warren Buffett’s Annual Shareholder Letter for 2017, it can be found here.