| OMAHA, Neb.
OMAHA, Neb. May 6 Warren Buffett said on
Sunday most investors are better off putting their money in
low-cost index funds, though he believes he can still
outperform major market indexes.
"A very low-cost index is going to beat a majority of the
amateur-managed money or professionally-managed money," Buffett
said at a press conference, a day after the annual shareholder
meeting for his Berkshire Hathaway Inc. (BRKa.N) (BRKb.N)
insurance and investment company.
Buffett, worth $52 billion according to Forbes magazine in
March, also said investors shouldn't flock to increasingly
popular hedge funds, where managers typically receive a fixed
fee plus a percentage of profits.
"The gross performance may be reasonably decent, but the
fees will eat up a significant percentage of the returns," he
said. "You'll pay lots of fees to people who do well, and lots
of fees to people who do not do so well."
The Vanguard 500 Index fund (VFINX.O), whose $120.2 billion
of assets make it one of the largest index funds, has outgained
a majority of its "large blend" peers in the last one-, three-,
five- and 10-year periods, according to Morningstar Inc., a
Charlie Munger, Berkshire's vice chairman, said at the
press conference that many investors actually fare worse in
actively managed funds. He said many funds perform well when
they're small, but struggle to keep up when investors chase
that early performance, and pour in cash.
"Successful funds attract a massive amount of money, and
the later performance typically gets mediocre," he said. "Then
they keep publishing returns for the whole period for someone
who started 20 years ago.... The reporting has falsehood and
folly in it."
Buffett cited Fidelity Magellan (FMAGX.O), a top-performing
fund through the 1980s, but which has lagged S&P 500 over the
trailing one, three, five and 10-year periods.
Its asset base, once over $100 billion, has fallen to $43.4
billion, Morningstar data shows, as many investors sought
better returns elsewhere.
"If you take something like Fidelity Magellan, which Peter
Lynch ran terrifically, a lot of results were achieved with
smaller amounts," Buffett said.
"I'm not picking on them, because everybody has the same
situation," he added.
As for Berkshire, which ended March with nearly $90 billion
of stock and fixed-income investments, Buffett said "we think
we can do better than the S&P. I would be disappointed if our
portfolio didn't do a couple of percentage points better. I
would be amazed if it did (much) better."
Berkshire estimates that its per share book value rose at a
21.4 percent compounded annual rate from 1965, when Buffett
took over, to 2006, compared with a 10.4 percent annual gain
for the S&P 500 including dividends.