Morten E. Wulff

Buffett, Active Investing and Index Funds... In 2008, Warren Buffett issued a challenge to the hedge fund industry, and a million-dollar bet was made. Buffett's position was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two investing philosophies against each other: passive and active investing. Buffett picked the S&P500 Index. The hedge funders picked their actively managed funds. At the end of ten years, they looked back and Buffett won. A recent article in Bloomberg reinforces this point. Only one equity mutual fund, the $7.1B Baron Partners Fund, has outperformed the Invesco QQQ ETF (Nasdaq ETF) over the past 5, 10 and 15 years. Said differently, passively investing in the Nasdaq ETF exposed you to the gains of the best companies of this era without you having to do any work or diligence. All the best companies were part of the ETF. When one of those company lagged, their composition in the index fell or dropped all together. And when a company did well, their composition in the index would increase or they were added if they weren't part of it beforehand. Passive investing allowed the ETF manager to define simple rules and then do all the work for you. The companies it picked, because of its rigid rules, turned out to be far superior to those picked by active investors. So much so that only ONE fund (out of thousands) managed to beat the ETF. The lesson is that for most people, they will find that this is the superior method for investing in the stock market. Allocate some money (say each month) to a very low cost ETF and then let the ETF manager, natural selection and compounding do the rest.