“In all the professions there is value added by the professionals, as a group, compared to doing it yourself. In the investment world, that isn’t true,” Buffett said during Berkshire Hathaway’s annual shareholders’ meeting.
Buffett added that the active managers cannot do better than the aggregate of “the people who just sit tight.”
The 86-year-old multi-billionaire has been a critic of the hedge fund industry and its exorbitant fees. Hedge funds are known to charge investors fees known as “2-and-20”, meaning 2% of assets and 20% of profits. Those fees can vary with some being lower and others being as high as 3% and 30%.
Buffett pointed out that if you have $1 billion in assets under management, you get paid $20 million just for terrible performance. A $10 billion fund would generate $200 million in fees for lousy performance.
“In any other field, that would just blow your mind,” he said. “People get so used to it in the field of investment.”
Buffett told the crowd that he pays Berkshire’s young investment managers, Ted Weschler and Todd Combs, $1 million per year, plus a bonus for beating the S&P 500. Weschler and Combs each manage about $11 billion. It’s a far cry from 2-and-20.
To prove his point, Buffett made a famous bet with a fund-of-funds manager nine years ago that active investment managers, in aggregate, could not outperform a low-cost index fund over a period of time.
Buffett is currently winning that wager.
Instead of hedge funds, Buffett recommends that both large and small investors put their money in low-cost index funds, like those offered by Jack Bogle’s Vanguard.
At the annual meeting, Buffett opened the meeting by praising Bogle. He estimated that he’s put tens-of-billions into the pockets of American investors.
“Jack has probably done more for the American investor than any man in the country,” Buffett said.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.