Thursday, March 6, 2014

Warren Buffett's Recent Letter to Shareholders Touts Low Investment Costs


An earlier post, linked here, states that Warren Buffett inadvertently harms investors by being the near-universal top-of-mind example of the merits of active investment management. In his recent letter to Berkshire Hathaway shareholders Mr. Buffett seems to go out of his way to remedy the inadvertent harm.

How so?

By mention and repetition of the benefits of low cost, indexed investments. Or conversely of the reduced performance, on average, associated with high-fee managers or other substantial costs.

An excerpt from the letter: "[t]he 'know-nothing' investor who both diversifies and keeps his cost minimal is virtually certain to get satisfactory results."

The reference to a "know-nothing investor" brings to mind John Bogle's famous tenet about investing: "Nobody knows nothing." With these three words Mr. Bogle makes the point that trying to outsmart the market is difficult to the point of futility.

Here's another excerpt from the letter, in which Mr. Buffett speaks about a trust that will receive a cash bequest under his will:

"My advice to the trustee could not be more simple: [p]ut 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors - whether pension funds, institutions or individuals - who employ high-fee managers."

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