Index Funds Vs. Hedge Funds: Buffett’s Bet, 10 Years Later

Warren Buffett is of course as the golden-touch investor who is chairman and CEO of Berkshire Hathaway. Each year he writes a letter to his shareholders, and along with an update on just what the firm did the previous year, he often discusses some broader point. In the last couple of years, Buffett’s annual letter has harked back to a revealing bet he made 10 years in December 2007.

Just to set the stage, December 2007 is the leading edge of what would become the Great Recession in 2008 and 2009. But even those who were concerned about the economy at that time were not predicting that the stock market would fall by half over the next 18 months or so. But it is in December 2007 that Buffett made a bet that the average of the stock market over the following 10 years would outperform the hedge funds that were using fancy investment strategies–and charging high fees. Here’s how Buffett tells the story in his 2016 letter: 

“In Berkshire’s 2005 annual report, 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. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund. …