500 of them

10 quotes from Warren Buffett’s letter to investors about the great Wall Street rip off

Warren Buffett just roasted Wall Street.

Warren Buffett just used more than 3,200 words to basically destroy Wall Street and one of its main sources of income — taking fees from the cash you invest with them.

If you’re not sure what‘s going on here, there’s a quick story you need to know about. In 2005, Buffett made a $500,000 bet. He essentially said an S&P 500 index fund would outperform any basket of hedge funds. The hedge funds might have the look or a ridiculously over the top name like Swift Eagle Crane Capital or Stat Sig Alpha Management, but still a basic low-fee S&P 500 index fund would outperform them over a long period.

Buffett won. And in his recent letter to investors he explains in detail what happened and what he thinks everyone can learn from his $500,000 wager. Here are 10 hand-picked quotes from his letter and at the bottom you can find a link to the entire letter.

1. Here’s Buffett explaining exactly what happened:

“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 investing vehicles — that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of fund managers — who could include their own fund as one of the five — to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities.”

2. Here’s Buffett explaining how he straight up eviscerated hedge funds with his simple bet. Mic dropped. Game over:

“In it, the five funds-of-funds delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000. The index fund would meanwhile have gained $854,000.”

3. In which Buffett drops an amazing parody based on a classic Wall Street movie:

“I’m certain that in almost all cases the managers at both levels were honest and intelligent people. But the results for their investors were dismal — really dismal. And, alas, the huge fixed fees charged by all of the funds and funds-of-funds involved — fees that were totally unwarranted by performance — were such that their managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have put it: “Fees never sleep.”

4. You might have a Vanguard fund. Do you know who the founder of Vanguard is? Buffett says he’s one of the most underrated men in all of finance:

“If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing — or, as in our bet, less than nothing — of added value.”

5. Buffett explains how Bogle fought against countless enemies, critiques, and haters. A lesson even for anyone trying to start their own firm or business today:

“In his early years, Jack was frequently mocked by the investment-management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”

6. Plot twist. You ready? Buffett thinks no other class has been scammed by Wall Street harder than the elite. And not because of their incompetence, but because of their desire to feel elite:

“In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” — wealthy individuals, pension funds, college endowments and the like — have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is — on an expectancy basis — clearly the best choice.

7. How much money have hedge funds earned in fees regardless of performance? Here’s Buffett’s calculation:

“My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.”

8. One of Buffett’s greatest skills is his ability to observe human behavior and watch it repeat over time — in panics and in booms. He writes:

“Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else.”

9. When Buffett drops an adage, you have to pay attention:

“The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.””

10. Yes, Buffett has a brother-in-law named Homer. And of course Homer has a great little lesson for everyone:

“Long ago, a brother-in-law of mine, Homer Rogers, was a commission agent working in the Omaha stockyards. I asked him how he induced a farmer or rancher to hire him to handle the sale of their hogs or cattle to the buyers from the big four packers (Swift, Cudahy, Wilson and Armour). After all, hogs were hogs and the buyers were experts who knew to the penny how much any animal was worth. How then, I asked Homer, could any sales agent get a better result than any other? Homer gave me a pitying look and said: “Warren, it’s not how you sell ’em, it’s how you tell ‘em.” What worked in the stockyards continues to work in Wall Street.”

Now if you want to read Buffett’s entire letter to investors, and even see his annual report for 2016, go to this PDF right here. If you enjoyed this compilation of Buffett quotes, or learned something new about fees on Wall Street, please like or share this post!

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