Billionaire investment guru Warren Buffett has issued his annual state of the markets letter to shareholders in his flagship Berkshire Hathaway conglomerate.
Buffett has a reputation for setting out his simple investment principles that have made him and a lot of investors very rich.
Every year, he addresses his shareholders to update them on strategy and performance, and this year was no exception.
At the annual general meeting of Berkshire Hathaway, Buffett renewed his regular assault on hedge funds.
He argues investing in hedge funds is foolish but popular.
Wall Street myth
“Wall Street makes more money out of hedge funds from the abilities of salesmen rather than those of fund managers,” said Buffett. “A small handful have ever made profits.
“Hedge fund managers claim they can regularly beat the markets, but the data reveals a different story.”
Buffett explained that tracker or index funds had beaten hedge funds almost every year since the downturn.
He also pointed out that hedge fund managers slice a 2% management fee and 20% of profits from invested funds.
“In other businesses, those charges would be considered extortionate and customers would refuse to pay,” said Buffett.
“It seems well-heeled investors are willing to pay and do not look around for cheaper places to put their money with better returns.”
Tracking down index funds
Buffett gave Vanguard Total World Stock ETF as an example.
The fund holds shares in 7,500 companies around the world while charging a 0.14% annual fee and demands no slice of any profits.
“I own the fund because it is cheap, has shares in nearly every big company in the world and it is diversified,” said Buffett.
He also reiterated his own investment philosophy of buying into and holding well-managed companies that offer growth over time.
His other advice to investors includes:
Buy total or world stock tracker funds or ETFs that have interests in companies across the globe
Follow the same route with bonds
Own real estate through tracker funds
Don’t trade them
Buffett argues it is easier to make a good decision and stick with it than to try to beat the market and have a trail of bad decisions that consistently lose money.