It is hard to not have heard the name of Warren Buffet. He is an American business magnate, investor, speaker, philanthropist and the the chairman and CEO of Berkshire Hathaway. He’s the man whose investing advice you should follow, with good reason: known as the ‘Oracle of Omaha’, Warren Buffett is one of the most successful investors of all time. The CEO of Berkshire Hathaway, which owns more than 60 companies, including insurer Geico, battery maker Duracell and restaurant chain Dairy Queen, he first bought stock at age 11 and first filed taxes at age 13. So when he says, ‘Price is what you pay. Value is what you get,’ you etch those words in the deepest corners of your mind.
Warren Buffet’s investing philosophy idolizes patience: sometimes the best way to make money in the stock market over time is to do nothing but invest passively. This led to him make a wager a decade ago.
What’s the $1 million wager that proved Buffet the undisputed investing guru yet again?
One decade ago, Warren Buffett took a $1 million wager that investing money in an index fund would make you richer than if you entrusted it with hedge fund managers.
He posited that if you invest in a boring, low-cost stock index fund, our investment could outperform most hedge funds over the ensuing decade. This meant no new investments. He did not budge in the face of 2008 market crash. He just stayed invested in an index fund, passive as ever. While the index funds survived the crash, hedge funds, which had otherwise gotten off to a smashing start, went under in 2008.
So why did a simple investment yield more than a managed fund? Here’s the thing: active hedge fund managers have to charge for their management – these fees can be egregious, up to 2% annually and 20% of profits. That’s a huge amount, specially if markets underpeform. Moreover, fund managers may often tend buy and sell more frequently than required in a bid to justify their hefty fees.
The final results at the end of the decade were this: Buffett’s money stashed in a plain-vanilla stock fund averaged a 7.1% compounded average return, and the hedge fund basket yielded 2.2%. Buffett wanted to exemplify what he opined: the exorbitant fees that hedge funds charge are not worth it, because index funds can outperform them anyway.
What is the lesson here?
Warren Buffet has mastered the skill of investing – he understands the nuances and has developed a keen eye for opportunities over time. He can acutely study an offer and call its bluff. Most of us, however, aren’t a natural when it comes to investing. Some of us don’t have a penchant for it, yet others prefer to stay away from the jargon. But even so, we would still like to invest in the market with the goal of wealth creation. And Buffet’s mantra is exactly that: Making money on the stock market “does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals.”
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