Buffett slams Wall Street 'monkeys', says hedge funds, advisors have cost clients $100 billion

[Mainecat]

 

CNBC.c

Buffett slams Wall Street 'monkeys', says hedge funds, advisors have cost clients $100 billion

John Melloy | @johnmelloy

Warren Buffett on Saturday devoted more than four pages of his 29-page annual shareholder letter to criticism of active managers on Wall Street, excoriating what he perceived as exorbitant fees they charge for returns that fail to live up to lofty assumptions.

Meanwhile the legendary stock picker extolled the virtues of passive investing and its advantages for regular investors. The 'Oracle of Omaha' even compared active managers to monkeys, and estimated that financial advisors, in their futile search for ways to beat the market, had cost clients $100 billion in wasted fees in the last 10 years.

"When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients," stated the widely-read letter released on Saturday morning. "Both large and small investors should stick with low-cost index funds."

 

Chris Kleponis | Bloomberg | Getty Images

'The results were dismal'

Buffett started this critical section of the letter with an update on a 10-year wager against Wall Street's active management he made nine years ago, with the proceeds going to a charity. This is how the billionaire described his original challenge:

"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. Why should they fear putting a little of their own money on the line?"

To his surprise, only one person stepped up to take the other side of the bet: Protégé Partners' Ted Seides, a 'fund of funds' manager. According to the bet, Seides selected five funds of hedge funds, whose results after fees would be averaged and compared to Buffett's selection, a Vanguard S&P index fund.

Here's what happened, according to the letter: 

"The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily prove typical for the stock market over time...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."

In fact, none of the basket of funds came even close, according to Buffett:

Source: Berkshire Hathaway 2016 shareholder letter

"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," Buffett wrote. "As Gordon Gekko might have put it: 'Fees never sleep.'"

Investors seem to be heeding Buffett's anti-active advice, as more than $20 billion flowed out of U.S. active equity funds in January despite a rising stock market, according to Morningstar. In the last 12 months, more than half a trillion dollars have flowed into passive funds, while active funds have experienced outflows, Morningstar's data showed. 

In his letter, Buffett criticized how the whole Wall Street complex is still set up to send pension funds, endowments and other investor types into under-performing active vehicles. He claimed that the wealthy investor classes are getting ripped off the most:

"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. 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. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative."

Buffett stated that he knows of only 10 managers that he spotted early on who could outperform the S&P 500 over the long term, and they did so. He acknowledged there are more out there who may be able to beat the market, but they are the clear exception. 

"Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that some investment professionals, just as some amateurs, will be lucky over short periods," Buffett wrote.

"If 1,000 managers make a market prediction at the beginning of a year, it's very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him."

The billionaire heaped praise on Jack Bogle, the founder of the Vanguard Group who started the first index fund 40 years ago.

"If a statue is ever erected to honor the person who has done the most for American investors, the hands down choice should be Jack Bogle," the letter stated. "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," Buffett added.

 

http://www.cnbc.com/2017/02/25/buffett-slams-wall-street-monkeys-says-hedge-funds-cost-100-billion.html

[DriftBusta]

He's spot on about most hedge fund managers.

[Mainecat]

6 minutes ago, DriftBusta said:

He's spot on about most hedge fund managers.

Yup.

[Snoslinger]

in a related matter, doesn't trump want to kill the "fiduciary rule", that helped these managers act in the client's best interest, rather than their own? 

[Mainecat]

Just now, Snoslinger said:

in a related matter, doesn't trump want to kill the "fiduciary rule", that helped these managers act in the client's best interest, rather than their own? 

Yup 

[DriftBusta]

1 minute ago, Snoslinger said:

in a related matter, doesn't trump want to kill the "fiduciary rule", that helped these managers act in the client's best interest, rather than their own? 

No.  He wants to review it, and has pushed its implementation out another 60 days.  Like most new federal laws, its intent is good, but its got some ridiculous provisions that are NOT in the consumers best interest.

[f7ben]

Just now, DriftBusta said:

No.  He wants to review it, and has pushed its implementation out another 60 days.  Like most new federal laws, its intent is good, but its got some ridiculous provisions that are NOT in the consumers best interest.

Oh , I'm sure Trump is absolutely working in the consumers best interest

[Snoslinger]

7 minutes ago, DriftBusta said:

No.  He wants to review it, and has pushed its implementation out another 60 days.  Like most new federal laws, its intent is good, but its got some ridiculous provisions that are NOT in the consumers best interest.

ok good, we should see tougher laws in the near future..

 

[teamgreen02]

Buffett is spot on.  Active fund managers have not provided the returns they have been charging for and consumers have been getting ripped off. It's the reason you see billions of dollars flooding into Vanguard and other low cost firms or ETFS.  

I'm actually going to cite his annual shareholders letter as support for the efficient market hypothesis in a paper for my finance class this semester.

All my money is in low cost index funds, tilted with more than market weightin to mid and small cap stocks.

Regarding the fiduciary rule, I think it is a good thing, but we will see what Trump does. The industry is out of control and needs regulation for advisors to act in the best interest of customers, not in interest of their commission.

 

[DriftBusta]

16 minutes ago, f7ben said:

Oh , I'm sure Trump is absolutely working in the consumers best interest

Actually he is, but you wouldn't have a clue either way.  Taking consumers ability to invest in A shares is about as dumb as can be, when the alternatives are fee based accounts, C shares with CDSC's or passively managed ETFs.  

[f7ben]

6 minutes ago, DriftBusta said:

Actually he is, but you wouldn't have a clue either way.  Taking consumers ability to invest in A shares is about as dumb as can be, when the alternatives are fee based accounts, C shares with CDSC's or passively managed ETFs.  

banker 

[DriftBusta]

1 minute ago, teamgreen02 said:

Buffett is spot on.  Active fund managers have not provided the returns they have been charging for and consumers have been getting ripped off. It's the reason you see billions of dollars flooding into Vanguard and other low cost firms or ETFS.  

I'm actually going to cite his annual shareholders letter as support for the efficient market hypothesis in a paper for my finance class this semester.

All my money is in low cost index funds, tilted with more than market weightin to mid and small cap stocks.

Regarding the fiduciary rule, I think it is a good thing, but we will see what Trump does. The industry is out of control and needs regulation for advisors to act in the best interest of customers, not in interest of their commission.

 

Right on the money.  We don't trade in hedge funds, penny stocks, commodities, options, derivatives or any investment that has an unacceptable level of volatility or risk.  These types of investments are where much of the abuses have occurred.  There are many firms who DO whats in the best interest of the client, and put every trade/portfolio design through a compliance review, to ensure its not only legal, but ethical and in clients best interest.  However as good as Vanguard funds are, they're predatory within the industry, and there are some less than savory practices they've done that has experienced FAs moving away from them.  Small and mid caps are where the best gains are happening right now for sure, and if you're young, absolutely stick to quality growth funds.

[f7ben]

1 minute ago, DriftBusta said:

Right on the money.  We don't trade in hedge funds, penny stocks, commodities, options, derivatives or any investment that has an unacceptable level of volatility or risk.  These types of investments are where much of the abuses have occurred.  There are many firms who DO whats in the best interest of the client, and put every trade/portfolio design through a compliance review, to ensure its not only legal, but ethical and in clients best interest.  However as good as Vanguard funds are, they're predatory within the industry, and there are some less than savory practices they've done that has experienced FAs moving away from them.  Small and mid caps are where the best gains are happening right now for sure, and if you're young, absolutely stick to quality growth funds.

INVEST WITH UNCLE WOOLIE..............100% GAINS GUARANTEED !!!!!

[DriftBusta]

6 minutes ago, f7ben said:

INVEST WITH UNCLE WOOLIE..............100% GAINS GUARANTEED !!!!!

I helped a 68 year old widow who was sold a bill of goods by the local bank, watch her 102 grand fluctuate back and forth for 3 years, stay at 102 grand.  5 months after I brought her on board, her account is now at 113k.  So theres that.  Not sure how they're able to get away with such incompetence, but I'm all for laws that reign in shit like that.  Anyone with a clue would have looked at her portfolio and made big changes.  Brought her funds over in kind and just moved them to different funds, within the same family.  For no fees.  Huh.  Except now I get the trail commission on it, instead of the dirtbag who sold them to her.   Do the math on approximately 15-20 basis points.  No one is getting rich on that transaction.  And anyone can manage their own money.  Managing others is a whole other matter.

[f7ben]

12 minutes ago, DriftBusta said:

I helped a 68 year old widow who was sold a bill of goods by the local bank, watch her 102 grand fluctuate back and forth for 3 years, stay at 102 grand.  5 months after I brought her on board, her account is now at 113k.  So theres that.  Not sure how they're able to get away with such incompetence, but I'm all for laws that reign in shit like that.  Anyone with a clue would have looked at her portfolio and made big changes.  Brought her funds over in kind and just moved them to different funds, within the same family.  For no fees.  Huh.  Except now I get the trail commission on it, instead of the dirtbag who sold them to her.   Do the math on approximately 15-20 basis points.  No one is getting rich on that transaction.  And anyone can manage their own money.  Managing others is a whole other matter.

I'm just trying to get under your skin dude I'm sure you do a fine job.

My uncle has 1.3 mil under management with some assfuck for the last 4 years and has seen under 2% average annual returns. I keep asking my dad why he doesnt fly down there and shake my uncle until he passes out. Market is up 50-60-80% in that time and he hasnt made any money???????

There sure as fuck are some greasy motherfuckers out there scamming people , that is for sure

Edited February 26, 2017 by f7ben

[DriftBusta]

14 minutes ago, f7ben said:

I'm just trying to get under your skin dude I'm sure you do a fine job.

My uncle has 1.3 mil under management with some assfuck for the last 4 years and has seen under 2% average annual returns. I keep asking my dad why he doesnt fly down there and shake my uncle until he passes out. Market is up 50-60-80% in that time and he hasnt made any money???????

There sure as fuck are some greasy motherfuckers out there scamming people , that is for sure

I've pointed that out and why I support some good reforms.  DOA ruling is a fucking mess though.  Your uncles probably in a managed account, where the advisor picks a model and plugs him into it.  We have them too, and honestly, most of them aren't that great.  Is he in retirement?  They have so much downside protection built into them, a good chunk of the portfolio goes backwards, and the -5% returns cut into the stuff thats up 10-15+%....thats fine if we get into correction territory or another recession, but it only takes a minute to move out of one investment to another.   You get a fat lazy FA who's managing a couple hundred million of other peoples money, his account gets on a back burner.  Then you have other people who are so risk averse, they stay in fixed income, annuities, etc., and then wonder why their stuff is only growing at 2-3%.  Active management works.  We have a fee based platform now, that works way better, but it involves active conversations with the client, and lots of regular fine tuning by the FA, not a computer model set and forget style.

[f7ben]

2 minutes ago, DriftBusta said:

I've pointed that out and why I support some good reforms.  DOA ruling is a fucking mess though.  Your uncles probably in a managed account, where the advisor picks a model and plugs him into it.  We have them too, and honestly, most of them aren't that great.  Is he in retirement?  They have so much downside protection built into them, a good chunk of the portfolio goes backwards, and the -5% returns cut into the stuff thats up 10-15+%....thats fine if we get into correction territory or another recession, but it only takes a minute to move out of one investment to another.   You get a fat lazy FA who's managing a couple hundred million of other peoples money, his account gets on a back burner.  Then you have other people who are so risk averse, they stay in fixed income, annuities, etc., and then wonder why their stuff is only growing at 2-3%.  Active management works.  We have a fee based platform now, that works way better, but it involves active conversations with the client, and lots of regular fine tuning by the FA, not a computer model set and forget style.

Uncle is paralyzed and has had several million since his settlement in 1979 ....it has been up and down that whole time. I assume he is in some type of low risk managed account. He told the guy he needs to draw 2600$ per month and doesnt want to lose any more money. 

The thing that gets me is he cant even get the fucking asshole to answer the phone. If I have 1 million plus with an FA and he doesnt answer the phone my money is gone the next day no questions asked.

[Zambroski]

1 hour ago, DriftBusta said:

He's spot on about most hedge fund managers.

Yep.  I hate em myself.  Gross.

1 hour ago, DriftBusta said:

No.  He wants to review it, and has pushed its implementation out another 60 days.  Like most new federal laws, its intent is good, but its got some ridiculous provisions that are NOT in the consumers best interest.

Yep.  But stop spreading reality to the libs.  It just makes them sadder...or more confused...or both...who fucking cares though.

 

1 hour ago, f7ben said:

Oh , I'm sure Trump is absolutely working in the consumers best interest

You do realize that for the R's to carry the full eight (or more) easily, it's going to take the the Democrats to continue to fuck their own holes ignorantly (as of yesterday...going as planned).  AND Trump's admin actually HAS TO get some positive things done and show working Americans job opportunities and REAL financial security leading them to consumer confidence spending to grow our economy (REAL growth...not that shit the Fake News has been spreading for the last eight).  This isn't gonna be like the Obama-ites where the media can spin all his ineptness into some type of positive gain for a second election (still mind boggling).  

Now, I know they Righty-Whities of the American working majority aren't "intellectually elite" but it's not hard for them to look around as ask "What the fuck?".  See: 2016 Presidential Election.

[snoughnut]

2 hours ago, DriftBusta said:

No.  He wants to review it, and has pushed its implementation out another 60 days.  Like most new federal laws, its intent is good, but its got some ridiculous provisions that are NOT in the consumers best interest.

[oleroule]

[DriftBusta]

1 hour ago, f7ben said:

Uncle is paralyzed and has had several million since his settlement in 1979 ....it has been up and down that whole time. I assume he is in some type of low risk managed account. He told the guy he needs to draw 2600$ per month and doesnt want to lose any more money. 

The thing that gets me is he cant even get the fucking asshole to answer the phone. If I have 1 million plus with an FA and he doesnt answer the phone my money is gone the next day no questions asked.

There are many broker dealers who's compensation is so dependant on generating commissions, its not a surprise, that many companies (think banks and insurance companies) have decided to get out of the business, or you get a 1-800 line unless you have at least 500k.  He should call his local EJ office and let them look at his statements.  Seriously.

53 minutes ago, Zambroski said:

Yep.  I hate em myself.  Gross.

Yep.  But stop spreading reality to the libs.  It just makes them sadder...or more confused...or both...who fucking cares though.

 

You do realize that for the R's to carry the full eight (or more) easily, it's going to take the the Democrats to continue to fuck their own holes ignorantly (as of yesterday...going as planned).  AND Trump's admin actually HAS TO get some positive things done and show working Americans job opportunities and REAL financial security leading them to consumer confidence spending to grow our economy (REAL growth...not that shit the Fake News has been spreading for the last eight).  This isn't gonna be like the Obama-ites where the media can spin all his ineptness into some type of positive gain for a second election (still mind boggling).  

Now, I know they Righty-Whities of the American working majority aren't "intellectually elite" but it's not hard for them to look around as ask "What the fuck?".  See: 2016 Presidential Election.

exactly.  Especially on the bold.

Edited February 26, 2017 by DriftBusta

[Dave]

Woolards living in fantasy land.

[DriftBusta]

25 minutes ago, Dave said:

Woolards living in fantasy land.

Do what you do best Dave.  Go fuck a farm animal.

[Dave]

23 minutes ago, DriftBusta said:

Do what you do best Dave.  Go fuck a farm animal.

You spying on me again?

[Angry ginger]

7 hours ago, Snoslinger said:

in a related matter, doesn't trump want to kill the "fiduciary rule", that helped these managers act in the client's best interest, rather than their own? 

fiduciary rule as written wasn't great,  like many things trump has done some explanation of what was wrong and how it can be fixed might have been better than just shitcanning things.