With Warren Buffett, it’s always been about confidence in the long-term. Who else in 2007, at the advanced age then of 77, would enter a 10-year bet (wagering a not incidental $US1 million) about whether a selection of hedge funds could out-perform the S&P index?
At last week’s annual meeting of his Berkshire Hathaway, Buffett showed why he was confident, with an update on the eight-year old wager showing he is well ahead. He bet Protégé Partners, a leading hedge fund of funds manager, that they couldn’t select funds that could beat the performance of Vanguard’s S&P 500 index over 10 years.
So far, the S&P index is up 65.72% against 21.9% for the group of hedge funds. Considering the period includes the full impact of the GFC, it’s been a stiff test and the hedge funds haven’t covered themselves with glory. It looks like the hedge funds may have to shell out $1 million to a charity of Buffett’s choice.
It isn’t, as some have suggested, Buffett just backing an indexed approach. Buffett certainly isn’t an index hugger; he’s a very long-term investor, who buys on value (although he has advised small investors to put money into index funds rather than managed funds).
His bet was to emphasise that the fees charged by hedge funds are so high that they erode much of any capital gains. He was scathing of expensive asset consultants and other advisers working with big investors, arguing for the lowest cost, indexed approach (in line with another octogenarian and founder of Vanguard, John Bogle).
Buffett told Berkshire shareholders that Wall Streeters made “far more money . . . through (their) salesmanship abilities rather than investment talent.”
For any Berkshire shareholders looking for a fund manager, Buffett gave them three attributes to look for: “If you’re looking for a manager, find somebody that’s intelligent, energetic and has integrity.”
Then came one of his typical ‘zingers’. “If they don’t have the last, be sure they don’t have the first two. If you have somebody who lacks integrity, you want them to be dumb and lazy.”
The annual meeting, webcast for the first time in a major reversal of Berkshire’s policy of no filming or recording, showed that Buffett and his vice chairman Charlie Munger, haven’t changed much since I first saw them in action 10 years ago.
The crowds were different – now close to 40,000 and enough Chinese watching to justify a Mandarin translation. The question system was re-organised to allow more analysts and brokers to probe and to screen out hangers-on lauding Buffett or fishing for stock tips.
But it was still the Warren and Charlie show. The 85-year old Buffett – “I’m the young one” – still rollicked through questions. The 92 year-old Munger sat on his left, impassive, and regularly diving into a large box of See’s peanut brittle. (Buffett, who defended his sugar taste in answering a question about Coca Cola, resisted the peanut brittle until just before the lunchbreak).
As well as his advice to ignore high fee hedge funds, Buffett also fretted about the potential for derivatives contracts to wreak havoc in financial markets and said he would not invest in 45 of the 50 largest banks in the world. That is, apart from his favourites Bank of America and Wells Fargo; he didn’t mention if this extended to highly-ranked Australian banks.
Buffett said any Berkshire investment decisions weren’t based on its view of commodity prices. He said he “doesn’t have the faintest clue about long-term oil prices. Munger added: “I’m even more ignorant than you are.”
And Munger maintained his reputation for concise, outspoken advice, telling one questioner who asked for advice on investing in cattle that this was “among the worst businesses I can think of.”
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