Billionaire Warren Buffett, whose stock picks over several decades have turned Berkshire Hathaway Inc. into one of the most successful conglomerates, delivered another black eye to the investment industry on Saturday, saying investors should "stick with low-cost index funds."
"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," Buffett, widely considered one of the world's best investors, said in his annual letter to shareholders.
"Both large and small investors should stick with low-cost index funds."
Buffett, whose annual letter is scrutinized by investors who consider him "the Oracle of Omaha," estimated that the search for outperformance has caused investors to "waste" more than $100 billion over the past decade.
On Saturday, he called Vanguard Group founder Jack Bogle "a hero" for his early efforts to popularize index funds.
His own Berkshire Hathaway gained 20.8 percent per year from 1965 to 2016, compared to the S&P 500's 9.7 percent gain, the company said.
Read Warren Buffett’s annual letter here.
Yet Buffett has often said he believes most stock investors are better off with low-cost index funds than paying higher fees to managers who often underperform.
In 2014, Buffett said he plans to put 90 percent of the money he leaves his wife when he dies into an S&P 500 index fund and 10 percent in government bonds.
During the financial crisis, Buffett bet a founder of the asset management company Protege Partners LLC $1 million that a Vanguard S&P 500 stock index fund would outperform several groups of hedge funds of over the 10 years through 2017. The index fund is up 85.4 percent, Buffett said, while the hedge fund groups are up between 2.9 percent and 62.8 percent.
On Saturday, Buffett said the figures leave "no doubt" that he will win the bet. He plans to donate the money to Girls Inc of Omaha, a charity.
It looks like some investors are following Buffett's advice. Despite a roaring stock market in the United States, actively managed mutual funds bled $342 billion last year, their second straight year of losses. Passive index funds and exchange-traded funds attracted nearly $506 billion.
But Tim Armour, CEO of Capital Group Cos Inc., said index funds can expose investors to losses when markets turn sour. Capital, the active manager behind American Funds, is a top shareholder in Berkshire and oversees $1.4 trillion altogether.
"It's important to say that we don't dispute the data that has led Mr. Buffett and others to form their views," Armour said in a statement.
"However, a fairly simple fact has gotten lost in the debate. Simply put, not all investment managers are average."
LITTLE TO SAY ON TRUMP, SUCCESSION
Buffett's Berkshire Hathaway Inc on Saturday said its fourth-quarter profit rose 15 percent from a year earlier, as gains from investments and derivatives offset lower profit from the Burlington Northern Santa Fe LLC (BNSF) railroad and other operating units.
Buffett has run Berkshire since 1965. The company also owns dozens of stocks including Apple Inc., Coca-Cola Co., Wells Fargo & Co. and the four biggest U.S. airlines, and more than one-fourth of Kraft Heinz Co.
This year's letter and annual report gave no clues about who will succeed the 86-year-old Buffett, a question that shareholders and Wall Street have speculated about increasingly in recent years.
But Buffett lavishly praised Berkshire executive Ajit Jain, widely considered a candidate to succeed Buffett as chief executive, for smoothly running much of the conglomerate's insurance businesses.
Jain joined Berkshire in 1986, and Buffett immediately put him in charge of National Indemnity's small, struggling reinsurance operation. Jain has since "created tens of billions of value for Berkshire shareholders. If there were ever to be another Ajit and you could swap me for him, don't hesitate. Make the trade!"
Berkshire, which became one of the top 10 Apple Inc. investors in 2016, reported a gain on that investment of more than $1.6 billion after shares of the iPhone maker surged, the annual report showed.
Berkshire’s airline investments suggest that Buffett has overcome his two-decade aversion to the sector after an unhappy - though, he has said, profitable - investment in US Air Group.
Unlike last year, Buffett, who was a vocal supporter of Hillary Clinton, did not mention U.S. President Donald Trump by name. Buffett did, however, talk up the vibrancy of U.S. society and its inclusion of immigrants, one of the most polarizing issues under the Trump administration.
"One word sums up our country's achievements: miraculous," Buffett said.
"From a standing start 240 years ago - a span of time less than triple my days on earth - Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers."