Buffet Tees Off on Wall Street

Warren Buffet lambasted hedge funds and investment consultants at his annual Berkshire Hathaway meeting. In essence, he pretty much gutted everything Wall Street sells.

While we don't always agree with everything Mr. Buffet says, you do have to keep an open ear when the man opines on anything related to investing. And while we're not so sure his prescription of plunking your money into a stock index fund and letting it ride works for everyone - for reasons we won't get into here - we fully endorse the critique of Wall Street. (See "Why Wall Street Is and Always Will Be a Sales Organization, Part 1 and Part 2.)

What follows is a part of his rant attacking the "fee culture" of Wall Street:

“Supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you ‘just buy an S&P index fund and sit for the next 50 years.’ You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way. So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks,’ or ‘this manager is particularly good on the short side,’ and so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in the American business without cost. And then those consultants, after they get their fees, they in turn recommend to you other people who charge fees, which… cumulatively eat up capital like crazy.”

When you attempt to make this point as an industry professional to other professionals, you're typically ignored, vilified, or dismissed as a crank or a kook. But I suspect that any of you reading this who are not professionals, and who have a lick of common sense, will likely agree with Buffet, even if you've never been picked dry by layers of fees. As a professional, I assure you that Mr. Buffet's points are dead on.

Oh, and let's not forget the most "fun" part of this article: It's where the author recalls a bet Buffet made with a hedge fund:

...his multi-year bet with hedge fund Protege Partners. The bet, initiated by the New York fund back in 2006, was that over a decade, the cumulative returns of five fund-of-funds picked by Protege would outperform a Vanguard S&P 500 index fund, even when including fees...

Wanna guess how that bet's been going?

As of the end of 2015, the S&P 500 index fund had a cumulative return of 65.7%, outdoing the hedge fund teams’s 21.9% return. The S&P has outperformed in six of the eight individual years of the bet too.

For that you paid the hedge fund something like 1% (or more) on the total value of your assets, plus a "bonus" of typically 20% on any gains, never mind transaction costs for all the trading that hedge funds typically do. And yet, somehow, large investment pools like pensions and endowments continue to believe these funds are worth the money. Go figure.